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PREFACE
Audit in the course of Company Secretaryship provides the framework for understanding of
auditing concepts and standards of auditing in India.
For academic point of view, this book covers Executive level important aspects of the module of
the subject, as published by the Institute of Company Secretaries of India as well as detailed
explanations of concepts, flow charts, learning techniques, relevant judicial pronouncements as
to make the subject material more understanding.
The main features of the book are as under –
• The entire module has been covered.
• It provides comprehensive and critical study of all auditing concepts.
• All important and relevant judicial pronouncements, circulars, notifications, clarifications,

explanations etc have been incorporated.
• This book is incomplete without the notes of the students on the blank pages left for them. The
same is done with a purpose of helping the students stay attentive, alert and to pen down
concepts, charts and short forms in the way they can best learn and memorize.
The author craves the indulgence of the students/ readers of any error or imperfection which
might have, despite the best possible endeavors, crept in this work. Any suggestion for
improvement of this book could be emailed at sukhlecha.shubham@gmail.com, and the same
shall be great fully welcomed.
The author is, particularly thankful to Miss Komal Kulkarni without whose assistance this would
not have been possible.
With best wishes-
Author-
Mr. Shubhamm Sukhlecha

(CA, CS, LLB)
Email - Sukhlecha.shubham@gmail.com
No-8554883071
CONTENTS
S.NO. TOPICS PAGE NO.
1. Auditing Concepts 1.1 – 1.22
2. Types of Company Audit 2.1 – 2.24
3. Internal Audit 3.1 – 3.12
4. Internal Control 4.1 – 4.13
5. Review of Internal Control 5.1 – 5.16
6. Audit Engagement & Documentation 6.1 – 6.16
7. Past Examination papers -

(ALL EXAMS HELD TILL DATE)
CHAPTER 1
AUDITING- CONCEPTS
1. EVOLUTION OF AUDITING
2. DEFINITIONS OF AUDITING
Institute of Chartered Accountants of India (ICAI) defines Auditing as- Auditing is defined
as a systematic and independent examination of data, statements, records, operations and
performance of an enterprise for a stated purpose. In any auditing situation, the auditor perceives
and recognizes the propositions before him for examination, collect evidence, evaluates the same
and on this basis formulates his judgment which is communicated through his audit report”.
3. FEATURES OF AUDITING
1. Audit is a systematic and scientific examination of the books of accounts of a business;
2. Audit is undertaken by an independent person or body of persons who are duly qualified
for the job.
Shubhamm Sukhlecha INSPIRE ACADEMY
(CA, CS, BSL LLB, Diploma in Corp. laws) Page 1.1
3. Audit is a verification of the results shown by the profit and loss account and the state of
affairs as shown by the balance sheet.
4. Audit is a critical review of the system of accounting and internal control.
5. Audit is done with the help of vouchers, documents, information and explanations
received from the authorities.
6. The auditor has to satisfy himself with the authenticity of the financial statements and
report that they exhibit a true and fair view of the state of affairs of the concern.
7. The auditor has to inspect, compare, check, review, scrutinize the vouchers supporting
the transactions and examine correspondence, minute books of share holders, directors,
Memorandum of Association and Articles of association etc., in order to establish
correctness of the books of accounts.
4. OBJECTIVES OF AUDITING
The objectives of auditing may be classified into two parts:
1. The primary objective
2. The secondary or incidental objective.
Primary Objective - The primary objective of the auditors is to report to the owners whether the
balance sheet give a true and fair view of the company’s state of affairs and the correct figure of
the profit or loss for the financial year.
Secondary objective - It is also called the incidental objective as it is incidental to the
satisfaction of the main objective. The incidental objectives of auditing are:
(i) Detection and prevention of frauds, and
(ii) Detection and prevention of errors.
5. SCOPE OF AUDITING

6. Auditing and Assurance Standards Board - ICAI
The International Federation of Accountants (IFAC) came into existence in 1977 and constituted
International Auditing Practices Committee (IAPC) to formulate International Auditing
Guidelines. These guidelines were later on converted into International Standards on Auditing
(ISA). Considering the developments in the field of auditing at international level, the need for
issuing Standards and Guidance Notes in tandem with international standards but conforming to
national laws, customs, usages and business environments was felt. With this objective, ICAI
constituted the Auditing Practices Committee (APC) on September 17, 1982, to spearhead the
new framework of Statements on Standard Auditing Practices (SAPs) and Guidance Notes
(GNs) inter alia to replace various chapters of the old omnibus Statement on Auditing Practices
issued in 1964. In July, 2002, the Auditing Practices Committee has been converted into an
Auditing and Assurance Standards Board by the Council of the Institute, to be in line with the
international trend.
The main function of the AASB is to review the existing auditing practices in India and to
develop Statements on Standards on Auditing (SAs) so that these may be issued by the Council
of the Institute. While formulating the SAs, the AASB takes into consideration the ISAs issued
by the IAPC, applicable laws, customs, usages and business environment in India. The SAs are
issued under the authority of the Council of the Institute. The AASB also issues Guidance Notes
on the issues arising from the SAs wherever necessary. The AASB has also been entrusted with
the responsibility to review the SAs at periodical intervals.
7. Standards on Auditing
Standards on Auditing prescribe the norms of principles and practices, which the Auditors are
expected to follow in the conduct of Audit. They provide minimum guidance to the Auditor that
helps determine the extent of auditing steps and procedures that should be applied in the audit
and constitute the criteria or yardstick against which the quality of audit results are evaluated.
Scope of SAs: The SAs apply whenever an independent audit is carried out; that is, in the
independent examination of financial information of any entity, whether profit oriented or not,
and irrespective of its size, or legal form (unless specified otherwise) when such an examination
is conducted with a view to expressing an opinion. The SAs may also have application, as
appropriate, to other related functions of auditors. Any limitation on the applicability of a
specific SA is made clear in the introductory paragraph of the SA.
8. BASIC PRINCIPLES GOVERNING AN AUDIT

SA 200 “Basic Principals Governing an Audit”, describes the basic principles which govern the
auditor’s professional responsibilities and which should be complied with wherever an audit is
carried. They are described below:

(i) Integrity objectivity and independence: An auditor should be honest, sincere, impartial
and free from bias. He should be a man of high integrity and objectivity.
(ii) Confidentiality: The auditor should respect confidentiality of information acquired
during the course of his work and should not disclose the information without the prior
permission of the client, unless there is a legal duty to disclose.
(iii) Skill and competence: The auditor must acquire adequate training and experience. He
should be competent, skillful and keep himself abreast of the latest developments
including pronouncements of ICAI on accounting and auditing matters.
(iv) Work performed by others: If the auditor delegates some work to others and uses work
performed by others including that of an expert, he continues to be responsible for
forming and expressing his opinion on the financial information.
(v) Documentation: The auditor should document matters which are important in providing
evidence to ensure that the audit was carried out in accordance with the basic principles.
(vi) Planning: The auditor should plan his work to enable him to conduct the audit in an
effective, efficient and timely manner. He should acquire knowledge of client’s
accounting system, the extent of reliance that could be placed on internal control and
coordinate the work to be performed.
(vii) Audit evidence: The auditor should obtain sufficient appropriate evidences through the
performance of compliance and other substantive procedures to enable him to draw
reasonable conclusions to form an opinion on the financial information.
(viii) Accounting System and Internal Control: The management is responsible for
maintaining an adequate accounting system incorporating various internal controls
appropriate to the size and nature of business. He auditor should assure himself that the
accounting system is adequate and all the information which should be recorded has been
recorded. Internal control system contributes to such assurance.
(ix) Audit conclusions and reporting: On the basis of the audit evidence, he should review
and assess the audit conclusions. He should ascertain:
1. As whether accounting policies have been consistently applied;
2. Whether financial information complies with regulations and statutory requirements;
and
3. There is adequate disclosure of material matters relevant to the presentation of
financial information subject to statutory requirements.
The auditor’s report should contain a clear written opinion on the financial information. A clean
audit report indicates the auditor’s satisfaction in all respects and when a qualified, adverse or a
disclaimer of opinion is to be given or reservation of opinion on any matter is to be made, the
audit report should state the reasons thereof.

9. TRUE AND FAIR VIEW
The main object of audit is to find out whether the financial statements prepared by a company
show the true and fair view of the financial state of affairs of a company and if not then in what
respect they are not showing.
The accounts are said to be true and fair:
 The books of account have recorded all the business transaction correctly.
 The books of account have been prepared according to the accepted principles of
accountancy and have followed accounting standards issued by different regulatory
bodies.
 There are no errors and frauds present in the books of account.
 The financial statements that have been prepared by the company are in conformity
with the books of accounts and all mandatory provisions have been followed.
 The profit and loss shown in the profit and loss account shows the true and fair results of
entity’s operations and the value of assets and liabilities appears in the balance sheet is
showing the correct financial picture.
 The books of accounts must disclose all material facts regarding revenue, expenses,
assets and liabilities.
(Material means important and essential. The disclosure of important matters in the accounts
helps the users in taking business decisions. There should be neither suppression of
vital facts nor mis-statements.)
What constitutes true and fair is not defined under any law.
In order to show a true and fair view the auditor should ensure that:
1. The final accounts (Trading and Profit and loss Account and Balance Sheet) agree with
the books of accounts.
2. The closing stock is physically verified and valued properly.
3. Intangible assets like goodwill, patents, preliminary expenses or other deferred revenue
expenses are valued and written off properly.
4. Expenses/income of Capital nature is not treated as revenue and viceversa.
5. Contingent liabilities are not treated as actual liabilities and vice versa
6. Provision is made for all known losses and liabilities
7. Transactions are recorded on accrual basis, i.e. outstanding expenses, prepaid expenses,
income accrued and advance income is recorded properly
8. The exceptional or non-recurring transactions are disclosed separately in the accounts

10. ADVANTAGES OF AN INDEPENDENT AUDIT
1. It safeguards the financial interest of persons who are not associated with the
management of the entity, whether they are partners or shareholders.
2. It acts as a moral check on the employees from committing defalcations or
embezzlement.
3. Audited statements of account are helpful in setting liability for taxes, negotiating loans
and for determining the purchase consideration for a business.
4. This are also use for settling trade disputes or higher wages or bonus as well as claims in
respect of damage suffered by property, by fire or some other calamity.
5. An audit can also help in the detection of wastage and losses to show the different ways
by which these might be checked, especially those that occur due to the absence of
inadequacy of internal checks or internal control measures.
6. Audit ascertains whether the necessary books of accounts and allied records have been
properly kept and helps the client in making good deficiencies or inadequacies in this
respects. As an appraisal function, audit reviews the existence and operations of various
controls in the organizations and reports weakness, inadequacy, etc., in them.
7. Audited accounts are of great help in the settlement of accounts at the time of admission
or death of partner.
8. Government may require audited and certificated statement before it gives assistance or
issues a licence for a particular trade.
11. INVESTIGATION
Investigation is an exercise which is carried out with a specific objective. The investigation
means in-depth analysis of books of accounts, transaction, and event. Investigation exercise is
voluntary in nature and used extensively by Internal and management auditors.
Scope of investigation
No general principle can be laid down with regard to the scope of every type of investigation.
Scope of investigation, in each case, would be limited to the period or area to be covered by the
investigator.
Reasons for carrying out investigation

The real objective of conducting an investigation by an auditor on behalf of his client is to
provide him the desired information in the form of a report about the matter specified. Normally
the objective of investigation is to collect, analyze and evaluate facts in respect of desired field
of activity with a view on some special purpose as determined by the person on whose behalf the
investigation is undertaken.

The common reasons of getting the investigation done are listed below:
 Proposed purchase of business.
 Proposed sale of business.
 Reasons for low profitability.
 Cause of high employee turnover.
 Reliability of business data.
 Proposed investment in particular securities.
 Suspected fraud.
 Joining in existing partnership business.
 Borrowing funds.
 Lending funds.
 Proposed purchase of controlling shares
 Suspected misfeasance against directors.
 Detection of undisclosed income for tax purposes.
 Suspected misappropriation by trustees.
12. AUDIT AND INVESTIGATION DISTINGUISHED

1. Legal binding: Audit of annual financial statements of a company is compulsory under
the Companies Act, 1956. However, Investigation is not compulsory under the
Companies act, 1956 but voluntary depending upon necessity.
2. Object in view: Audit is conducted to ascertain whether the financial statements show a
true and fair view. Investigation is conducted with a particular object in view, viz to
know financial position, earning capacity, prove fraud, invest capital, etc.
3. Period covered: Audit is conducted on annual basis. Investigation may be conducted for
several years at a time, say three years.
4. Parties for whom conducted: Audit is conducted on behalf of shareholders (or
proprietor, or partners). Investigation is usually conducted on behalf of outsiders like
prospective buyers, investors, lenders, etc.

5. Documents: Audit is not carried out of audited financial statements. Investigation may
be conducted even though the accounts have been audited.
6. Extent of work: Audit is normally conducted on test verification basis. Investigation is

a thorough examination of books of accounts.
7. Report: Audit report of a company is addressed to shareholders (or proprietors or

partners). Investigation report is addressed to the party on whose instruction investigation
was conducted.
8. Person performing work: Audit is to be conducted by a person having prescribed

qualification i.e. Chartered accountant, Cost accountant. No statutory qualification is
prescribed for Investigation. It may be undertaken by any one.
13. MATERIALITY IN AUDITING

Materiality is a concept or convention within auditing and accounting relating to the
importance/significance of an amount, transaction, or discrepancy. The objective of an audit of
financial statements is to enable the auditor to express an opinion whether the financial
statements are prepared, in all material respects, in conformity with an identified financial
reporting framework such as Generally Accepted Accounting Principles (GAAP). The
assessment of what is material is a matter of professional judgment.
Materiality can be defined as the magnitude of an omission or misstatement of accounting

information that, in the light of surrounding circumstances, makes it probable that the judgment
of a reasonable person relying on the information would have been changed or influenced by the
omission or misstatement.
SA 320 “Materiality in Planning and Performing an Audit”, establishes standards on the concept
of materiality and the relationship with audit risk while conducting an audit. Hence, the auditor
requires more reliable evidence in support of material items. SA 320 defines material items as
relatively important and relevant items, i.e., items the knowledge of which would influence the
decision of the user of financial statements.

14. AUDITING STANDARD
In India the Auditing and Assurance Standards Board of the Institute of Chartered Accountants
of India formulates the auditing standards.
Procedure of issuing auditing standards:
15. INTERNATIONAL AUDITING STANDARDS

International Auditing standards are issued by the International Auditing and Assurance
Standards Board (IAASB). IAASB is a body of International federation of accountants (IFAC).
It is an independent standard-setting body that serves the public interest by setting high-quality
international standards for auditing, assurance, and other related standards, and by facilitating
the convergence of international and national auditing and assurance standards.
16. HARMONIZATION OF INDIAN AUDITING STANDARDS WITH INTERNATIONAL

AUDITING STANDARDS
The Institute of Chartered Accountants of India (ICAI) is a founder member of the International
Federation of Accountants (IFAC). It is one of the membership obligations of the Institute to
actively propagate the pronouncements of the International Auditing and Assurance Standards
Board (IAASB) of the IFAC to contribute towards global harmonization and acceptance of the
Standards issued by the IAASB.

Accordingly, while formulating Engagement and Quality Control Standards, the AASB takes
into consideration the corresponding Standards, if any, issued by the IAASB. In addition, the
AASB also takes into consideration the applicable laws, customs, usages and business
environment prevailing in India.
With effect from 1st April, 2008, the AASB re-categorised and re-numbered the existing
Auditing and Assurance Standards on the lines as followed by the IAASB. With this change, all
auditing and assurance standards (AAS) were renamed as standards on Auditing (SAs)
17. BRIEF OVERVIEW OF AUDITING STANDARDS IN INDIA

STANDARDS ON QUALITY CONTROL (SQCS)
SQC 1: Quality control for firms that perform audits and reviews of historical financial
information, and other assurance and related services engagements
Objective of SQC-1 is to provide the firm with reasonable assurance that its personnel comply
with applicable professional standards as well as regulatory and legal requirements, and that
reports issued by the firm or engagement partner(s) are appropriate in the circumstances
Elements of System of Quality Control

It is a primary standard which have applications for all other Standards and is all pervasive
Standards in respect of quality control. This standard contains extensive requirements in relation
to establishment and maintenance of a system of quality control (QC) for an auditing entity.
This standards describes the important elements of quality control system as
Leadership responsibilities for quality within the firm: The firm should establish policies and
procedures designed to promote an internal culture based on recognition that quality is essential
in performing engagements.
Ethical requirements: The firm should establish policies and procedures designed to provide it
with reasonable assurance that the firm and its personnel comply with relevant ethical
requirements
Acceptance and continuance of client relationships and specific engagements: The acceptance
and continuance of Quality Control policies are designed to provide the firm with reasonable
assurance that it will undertake or continue relationships and engagements only where it: (a) has
considered the integrity of the client and does not have information that would lead it to
conclude that the client lacks integrity; (b) is competent to perform the engagement and has the
capabilities, time and resources to do so (c) can comply with the ethical requirements.
Human resources: The Firm’s policies and procedures should be designed to provide it with
reasonable assurance that it has sufficient personnel with the capabilities, competence, and
commitment to ethical principles necessary to perform its engagements in accordance with
professional standards and regulatory and legal requirements to enable the Firm or engagement
partners to issue reports that are appropriate in the circumstances

Monitoring: The firm should establish policies and procedures designed to provide it with
reasonable assurance that the policies and procedures relating to the system of quality control are
relevant, adequate, operating effectively and complied with in practice.
18. STANDARDS FOR AUDITS AND REVIEWS OF HISTORICAL FINANCIAL

INFORMATION
SA 200: Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing
This Standard establishes the independent auditor’s overall responsibilities when conducting an
audit of financial statements in accordance with SAs.
Ethical Requirements Relating to an Audit of Financial Statements - The auditor should apply
the following fundamental principles of professional ethics relevant when conducting an audit of
financial statements; (a) Integrity; (b) Objectivity; (c) Professional competence and due care; (d)
Confidentiality; and (e) Professional behavior
Professional Skepticism - Professional skepticism includes being alert to, for example; (a)
Audit evidence that contradicts other audit evidence obtained;
(b) Information that brings into question the reliability of documents and responses to inquiries
to be used as audit evidence; (c) Conditions that may indicate possible fraud; (d) Circumstances
that suggest the need for audit procedures in addition to those required by the SAs
Professional Judgment - Professional judgment is necessary in particular regarding decisions

about:
(a) Materiality and audit risk; (b) The nature, timing, and extent of audit procedures used to
meet the requirements of the SAs and gather audit evidence; (c) Evaluating whether sufficient
appropriate audit evidence has been obtained, and whether more needs to be done to achieve the
objectives of the SAs and thereby, the overall objectives of the auditor; (d) The evaluation of
management’s judgments in applying the entity’s applicable financial reporting framework; (e)
The drawing of conclusions based on the audit evidence obtained, for example, assessing the
reasonableness of the estimates made by management in preparing the financial statements
Sufficient Appropriate Audit Evidence and Audit Risk - To obtain reasonable assurance, the
auditor shall obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably
low level and thereby enable the auditor to draw reasonable conclusions on which to base the
auditor’s opinion

Sufficiency and Appropriateness of Audit Evidence - Audit evidence is necessary to support the
auditor’s opinion and report. It is cumulative in nature and is primarily obtained from audit
procedures performed during the course of the audit. Sufficiency is the measure of quantity of
audit evidence whereas appropriateness is the measure of quality of audit evidence
Audit Risk - Audit risk is a function of the risks of material misstatement and detection risk. The
risks of material misstatement may exist at two levels:
(a) The overall financial statement level; and (b) The assertion level for classes of transactions,
account balances, and disclosures. For a given level of audit risk, the acceptable level of
detection risk bears an inverse relationship to the assessed risks of material misstatement at the
assertion level
Conduct of an Audit in Accordance with SAs - The auditor shall comply with all SAs relevant to
the audit. An SA is relevant to the audit when the SA is in effect and the circumstances
addressed by the SA exist. The auditor shall have an understanding of the entire text of an SA,
including its application and other explanatory material, to understand its objectives and to apply
its requirements properly. The auditor shall not represent compliance with SAs in the auditor’s
report unless the auditor has complied with the requirements of this SA and all other SAs
relevant to the audit
SA 210: Agreeing the Terms of Audit Engagements

The Standard deals with the auditor’s responsibilities in agreeing the terms of audit engagement
with management and, where appropriate, those charged with governance. SA 210 establishes
certain preconditions for an audit, responsibility for which rests with management or those
charged with governance. SA 210 also deals with the requirements relating to preconditions for
an audit, agreement on audit engagement terms, recurring audits, acceptance of a change in the
terms of the audit engagement and additional considerations in engagement acceptance. The
appendices to revised SA 210 contain the illustrative example of an audit engagement letter and
the factors determining the acceptability of general purpose frameworks.
SA 220: Quality Control for an Audit of Financial Statements

This Standard deals with the specific responsibilities of the auditor regarding quality control
procedures for an audit of financial statements. It also addresses, where applicable, the
responsibilities of the engagement quality control reviewer. It also deals with the aspects relating
to leadership responsibilities for quality on audits, relevant ethical requirements, acceptance and
continuance of client relationships and audit engagement, assignment of engagement teams,
engagement performance, monitoring and documentation requirements. This standard prescribes
that Quality control policies and procedures should be implemented at both level — of audit
firm and on individual audits.

SA 230: Audit Documentations
This Standard deals with the auditor’s responsibility to prepare audit documentation for an audit
of financial statements. It also deals with the requirements of timely preparation of audit
documentation; documentation of the audit procedures performed and audit evidence obtained
and assembly of the final audit file. It outlines about vesting of property of working papers with
the Auditor. SQC 1 read with SA 230 spells out two essential principles viz. period of
maintaining working papers and assembly of audit file by the auditor.
According to SA 230, Audit Documentation refers to the record of audit procedures performed,
relevant audit evidence obtained, and conclusions the auditor reached. Preparing sufficient and
appropriate audit documentation on a timely basis helps to enhance the quality of audit and
facilitates effective review and evaluation of audit evidence obtained and conclusions reached
before finalizing auditor’s report. According to this standard, retention period for audit
engagements ordinarily is no shorter than ten years from the date of auditor’s report, or, if later,
the date of group auditor’s report
SA 240: the Auditor’s Responsibilities Relating to Fraud in an Audit of Financial

Statements
The Standard adopts a risk-based approach to auditor’s responsibility relating to fraud in an
audit of financial statements. It, explains how the principles enunciated in SA 315, “Identifying
and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its
Environment” and SA 330, “The Auditor’s Responses to Assessed Risks” would be applied in
case of consideration of fraud in an audit of financial statements.
Auditor is concerned with fraud that causes a material misstatement in financial statements.
While auditor may be able to identify potential opportunities for fraud to be perpetrated, it is
difficult for him to determine whether misstatements in judgment areas such as accounting
estimates are caused by fraud or error. Risk of auditor not detecting a material misstatement
resulting from management fraud is greater than for employee fraud, because management is
frequently in a position to directly or indirectly manipulate accounting records, present
fraudulent financial information or override control procedures designed to prevent similar
frauds by other employees.
Auditor is responsible for maintaining an attitude of professional skepticism throughout the
audit. Auditor shall identify and assess risks of material misstatement due to fraud at financial
statement level, and at assertion level for classes of transactions, account balances and
disclosures. Auditor must make appropriate inquiries of the management. Auditor must discuss
with those charged with governance as they have oversight responsibility for systems for
accounting risk, financial control and compliance with the law
When auditor identifies a misstatement, s/he should consider whether such a misstatement may
be indicative of fraud and if there is such an indication, s/he should consider the implications of

misstatement in relation to other aspects of the audit, particularly the reliability of management
representations. When the auditor identifies a misstatement resulting from fraud, or a suspected
fraud, s/he should consider auditor’s responsibility to communicate that information to
management, those charged with governance and, in some circumstances, when so required by
laws and regulations, to regulatory and enforcement authorities also. The auditor should also
obtain written representations from management.
The auditor should document the understanding of entity and its environment and the assessment
of risks of material misstatement, responses to assessed risks of material misstatement and
communications about fraud made to management, those charged with governance, regulators
and others
SA 250: Consideration of Laws and Regulations in an Audit of Financial Statements

This Standard deals with the auditor’s responsibility to consider laws and regulations when
performing an audit of financial statements. It also deals with the effect of laws and regulations,
responsibility of management for compliance with laws and regulations, responsibility of the
auditor, audit procedures and reporting of identified or suspected non-compliance and
documentation requirements
It is management’s responsibility to ensure that entity’s operations are conducted in accordance
with laws and regulations. Auditor is not responsible for preventing non-compliance but he is
responsible for obtaining reasonable assurance that the financial statements, taken as a whole,
are free from material misstatement, whether caused by fraud or error.
Risk of non detection of material misstatements is higher with regard to material misstatements
resulting from non-compliance with laws and regulations due to various factors. The auditor
should obtain a general understanding of legal and regulatory framework applicable to the entity
and he should see how it is complying with that framework. After obtaining general
understanding, auditor should perform procedures to identify instances of non-compliance with
these laws and regulations where non-compliance should be considered when preparing
financial statements.
Auditor should obtain sufficient appropriate audit evidence about compliance with those laws
and regulations generally recognised by Auditor to have an effect on determination of material
amounts and disclosures in financial statements. To obtain written representations that
management has disclosed all known actual or possible non-compliance with laws and
regulations whose effects should be considered when preparing financial statements.
SA 260: Communication with those Charged with Governance

This Standard deals with the auditor’s responsibility to communicate with those charged with
governance in relation to an audit of financial statements. It also describes the requirements
regarding communication with those charged with governance and regarding matter to be
communicated and documentation required. This standard also spells out the distinction between

the Management and Those Charged with Governance
Auditor should communicate about Overall scope of audit; selection of/ changes in significant
accounting policies; potential effect on financial statements of any significant risks and
exposures, such as pending litigation; adjustments to financial statements arising out of audit
that have a significant effect on entity’s financial statements; material uncertainties related to
events and conditions that may cast significant doubt on entity’s ability to continue as a going
concern, disagreements with management about matters that could be significant to entity’s
financial statements or auditor’s report; expected modifications to auditor’s report. Auditors
should communicate matters of governance interest on timely basis. Auditor’s communication
may be made orally or in writing. In case of oral communication, auditor should document their
oral communications and response thereof
SA 265: Communicating Deficiencies in Internal Control to those Charged with

Governance and Management
This Standard on Auditing deals with the auditor’s responsibility to communicate appropriately
to those charged with governance and management deficiencies in internal control that the
auditor has identified in an audit of financial statements. It defines the terms “Deficiency in
internal control” and “Significant deficiency in internal control”. This Standard also deals with
the aspects like determination of whether deficiencies in internal control have been identified,
whether it is significant deficiencies in internal control and communicating deficiencies in
internal control. This standard somehow supplements the concept of ‘Letter of Weakness.’
SA 299: Responsibility of Joint Auditors

This Standard deals with the professional responsibilities which the auditors undertake in
accepting appointments as joint auditors. The SA, inter alia, lays down that the joint auditors
should, normally, by mutual discussion, divide the audit work among themselves. The division
of work among joint auditors as also the areas of work to be covered by all of them should be
adequately documented and preferably communicated to the entity. The SA also states that each
joint auditor is responsible only for the work allotted to him, whether or not he has prepared a
separate report on the work performed by him. The SA describes the areas for which joint
auditors are jointly and severally responsible. As per the SA, each joint auditor is entitled to
assume that the other joint auditors have carried out their part of the audit work in accordance
with generally accepted audit procedures. It also deals with the reporting responsibilities of the
joint auditors. standard very specifically states that the majority opinion would not be binding
upon the other joint auditor(s) The SA became effective for all audits relating to accounting
periods commencing on or after April 1, 1996.
SA 300 (Revised): Planning an Audit of Financial Statements

This Standard deals with the auditor’s responsibility to plan an audit of financial statements.
Planning an audit involves establishing the overall audit strategy for the engagement and

developing an audit plan. Once the overall audit strategy has been established, an audit plan can
be developed to address various matters identified in the overall audit strategy, considering the
need to achieve the audit objectives through efficient use of auditor’s resources. The auditor
should consider various matters in developing the overall plan like: terms of engagement; nature
and timing of reports; applicable legal or statutory requirements; accounting policies adopted by
the client; identification of significant audit areas; setting of materiality levels, etc. the auditor
should obtain a level of knowledge of client’s business that will enable them to identify events,
transactions and practices that, in their judgment, may have a significant effect on financial
information. Audit plan is more detailed than overall audit strategy that includes the nature,
timing and extent of audit procedures to be performed by engagement team members. In Audit
planning, the auditor should involve engagement partner and other key members of engagement
team also.
Identifying and Assessing the Risks of Material Misstatement Through

SA 315:
Understanding the Entity and Its Environment-
The Standard deals with the auditor’s responsibility to obtain an understanding of the entity and
its environment and using that understanding to identify and assess the risks of material
misstatement at the financial statement level and assertion level.
SA 320: Materiality in Planning and Performing an Audit

This Standard deals with the auditor’s responsibility to apply the concept of materiality in
planning and performing an audit of financial statements. This SA also deals with the
requirements of determining materiality and performance materiality when planning the audit,
revision as the audit progresses and documentation requirements.
SA 330: The Auditor’s Responses to Assessed Risks

This Standard on Auditing deals with the auditor’s responsibility to design and implement
responses to the risks of material misstatement identified and assessed by the auditor in
accordance with SA 315 at the financial statement level and assertion level. This SA also deals
with the aspects relating to overall responses to assessed risks, audit procedures responsive to
the assessed risks of material misstatement at the assertion level, adequacy of presentation and
disclosure, evaluating the sufficiency and appropriateness of audit evidence and documentation
requirements.
SA 402: Materiality in Planning and Performing an Audit

This Standard deals with the user auditor’s responsibility to obtain sufficient appropriate audit
evidence when a user entity uses the services of one or more service organizations. SA 402 also
deals with the aspects like obtaining an understanding of the services provided by a service
organisation, including internal control, responding to the assessed risks of material
misstatement, fraud, non-compliance with laws and regulations and uncorrected misstatements

in relation to activities at the service organisation and reporting by the user auditor.
SA 450: Evaluation of Misstatements Identified During the Audit

This Standard on auditing deals with the auditor’s responsibility to evaluate the effect of
identified misstatements on the audit and of uncorrected misstatements, if any, on the financial
statements. This standard defines the terms “Misstatement” and “Uncorrected misstatements”
and also deals with the aspects like accumulation of identified misstatements, consideration of
identified misstatements as the audit progresses, communication and correction of
misstatements, evaluating the effect of uncorrected misstatements, written representation and
documentation.
SA 500: Audit Evidence

This Standard is quite detailed in terms of audit evidence in an audit of financial statements, and
deals with the auditor’s responsibility to design and perform audit procedures to obtain sufficient
appropriate audit evidence to be able to draw reasonable conclusions on which to base the
auditor’s opinion. This SA also deals with the requirements of obtaining sufficient appropriate
audit evidence, how information to be used as audit evidence, how to select items for testing to
obtain audit evidence and procedures in case of inconsistency in, or doubts over reliability of,
audit evidence.
SA 501: Audit Evidence - Specific Considerations for Selected Items

The Standard deals with specific considerations by the auditor in obtaining sufficient appropriate
audit evidence in accordance with SA 330, SA 500 and other relevant SAs, with respect to
certain aspects of inventory, litigation and claims involving the entity, and segment information
in an audit of financial statements. This standard also deals with the requirements and
application of the aspects relating to inventory, litigation and claims and segment information.
SA 505: External Confirmations

The Standard deals with the auditor’s use of external confirmation procedures to obtain audit
evidence in accordance with the requirements of SA 330. It also deals with the requirements and
application of the aspects relating to external confirmation procedures, management’s refusal to
allow the auditor to send a confirmation request, results of the external confirmation procedures,
negative confirmations and evaluating the evidence obtained.
SA 510: Initial Audit Engagements - Opening Balances

The Standard establishes the principles regarding audit of opening balances in case of initial
engagements, i.e., when the financial statements are audited for the first time or when the
financial statements for the preceding period were audited by another auditor. This SA also deals
with the audit procedures and audit conclusions and reporting requirements in case of initial
audit engagements.
SA 520: Analytical Procedures
This Standard deals with the auditor’s use of analytical procedures as substantive procedures
(“substantive analytical procedures”), and as procedures near the end of the audit that assist the
auditor when forming an overall conclusion on the financial statements. Revised SA 520 also
deals with the requirements and application of the aspects relating to substantive analytical
procedures, analytical procedures that assist when forming an overall conclusion and
investigating results of analytical procedures.
SA 530: Audit Sampling

The Standard applies when the auditor has decided to use audit sampling in performing audit
procedures. It also deals with the auditor’s use of statistical and non-statistical sampling when
designing and selecting the audit sample, performing tests of controls and tests of details, and
evaluating the results from the sample. This SA also deals with the requirements relating to
sample design, size and selection of items for testing, performing audit procedures, nature and
cause of deviations and misstatements, projecting misstatements and evaluating results of audit
sampling.
SA 540:Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and

Related Disclosures
This Standard deals with the auditor’s responsibilities regarding accounting estimates, including
fair value accounting estimates, and related disclosures in an audit of financial statements.
Specifically, it expands on how SA 315 and SA 330 and other SAs are to be applied in relation
to accounting estimates. It also includes requirements and guidance on misstatements of
individual accounting estimates, and indicators of possible management bias.
SA 550: Related Parties

This Standard deals with the auditor’s responsibilities regarding related party relationship and
transactions when performing an audit of financial statements. This standard also deals with the
risk assessment procedures and related activities, identification and assessment of the risks of
material misstatement associated with related party relationships and transactions, responses to
the risks of material misstatement associated with related party relationships and transactions
and evaluation of the accounting for and disclosure of identified related party relationships and
transactions etc.
SA 560: Subsequent Events

The Standard deals with the auditor’s responsibilities relating to subsequent events in an audit of
financial statements. SA 560 also deals with the events occurring between the date of the
financial statements and the date of the auditor’s report, facts which become known to the
auditor after the date of the auditor’s report but before the date the financial statements are
issued and facts which become known to the auditor after the financial statements have been

issued.
SA 570 Going Concern

The Standard details the auditor’s responsibility in the audit of financial statements with respect
to management’s use of the going concern assumption in the preparation and presentation of the
financial statements. SA 570 requires the auditor to inquire of management as to its knowledge
of events or conditions beyond the period of management’s assessment that may cast significant
doubt on the entity’s ability to continue as a going concern. SA 570 also deals with the
requirements of risk assessment procedures and related activities, evaluating management’s
assessment, additional procedures, audit conclusions and reporting, use of going concern
assumption etc. The standard also discusses the principles when mitigating factors are present
vis-a-vis Going Concern of the enterprise.
SA 580: Written Representations

The Standard details the terms of the duties and objectives of the auditors regarding the
acknowledgement by the management that it is fulfilling its responsibility relating to preparation
and presentation of financial statements and internal controls, the various forms of management
representations, situations where management representations are unreliable or where the
management refuses to provide requested representations. This SA is effective for audits of
financial statements for periods beginning on or after April 1, 2009.
SA 600: Using the Work of another Auditor

This SA discusses the procedures to be applied in situations where an independent auditor
reporting on the financial statements of an entity, uses the work of an independent auditor with
respect to the financial statements of one or more divisions or branches included in the financial
statement of the entity. The Statement also discusses the principal auditor’s responsibility in
relation to his use of the work of other auditor.
SA 610: Using the work of Internal Auditors:

This Standard deals with the external auditor’s responsibilities regarding the work of internal
auditors. This SA also defines the terms “Internal audit function” and “Internal auditors”. SA
610 also deals with the aspects like determining whether and to what extent to use the work of
the internal auditors, using specific work of the internal auditors and documentation.
SA 620: Using the Work of an Auditor’s Expert

SA 620 deals with the auditor’s responsibilities regarding the use of an individual or
organisation’s work in a field of expertise other than accounting or auditing, when that work is
used to assist the auditor in obtaining sufficient appropriate audit evidence. SA 620 also deals
with the requirements and application of the aspects relating to determining the need for an
auditor’s expert, nature, timing and extent of audit procedures, the competence, capabilities and

objectivity of the auditor’s expert, obtaining an understanding of the field of expertise of the
auditor’s expert, agreement with the auditor’s expert, evaluating the adequacy of the auditor’s
expert’s and reference to the auditor’s expert in the auditor’s report. This standard should be
read in conjunction with SA 500 because Expert’s opinion also serves as audit evidence in
appropriate cases.
SA 700: Forming an Opinion and Reporting on Financial Statements

SA 700 deals with the auditor’s responsibilities to form an opinion on the financial statements
and the form and content of the auditor’s report issued as a result of an audit of financial
statements. SA 700 also deals with the requirements relating to forming an opinion on the
financial statements, form of opinion, auditor’s report, supplementary information presented
with the financial statements and the application guidance of these aspects. Appendix to revised
SA 700 also contains the Illustrative Formats of Auditors’ Reports on Financial Statements.
SA 705: Modifications to the Opinion in the Independent Auditor’s Report

This Standard on Auditing (SA) deals with the auditor’s responsibility to issue an appropriate
report in circumstances when, in forming an opinion in accordance with SA 700 (Revised), the
auditor concludes that a modification to the auditor’s opinion on the financial statements is
necessary. The objective of the auditor is to express clearly an appropriately modified opinion
on the financial statements that are necessary when:
(a) The auditor concludes, based on the audit evidence obtained, that the financial
statements as a whole are not free from material misstatement; or
(b) The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the
financial statements as a whole are free from material misstatement.
Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent

SA 706:
Auditor’s Report
This standard on Auditing deals with additional communication in the auditor’s report when the
auditor considers it necessary to: Draw users’ attention to a matter or matters presented or
disclosed in the financial statements that are of such importance that they are fundamental to
users’ understanding of the financial statements; or Draw users’ attention to any matter or
matters other than those presented or disclosed in the financial statements that are relevant to
users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report. Other
Standards on Auditing (SAs) may contain specific requirements for the auditor to include
Emphasis of Matter paragraphs or Other Matter paragraphs in the auditor’s report. In those
circumstances, the requirements in this SA regarding the form and placement of such paragraphs
apply. The objective of the auditor, having formed an opinion on the financial statements, is to
draw users’ attention, when in the auditor’s judgment it is necessary to do so, by way of clear
additional communication in the auditor’s report, to:

(a) A matter, although appropriately presented or disclosed in the financial statements, that
is of such importance that it is fundamental to users’ understanding of the financial
statements; or
(b) As appropriate, any other matter that is relevant to users’ understanding of the audit, the
auditor’s responsibilities or the auditor’s report.
SA 710: Comparative Information

SA 710 deals with the auditor’s responsibilities regarding comparative information in an audit of
financial statements. This SA defines the terms ‘Corresponding figures’, Comparative
information’ and ‘Comparative financial statements’. SA 710 also deals with the requirements
and application of the aspects relating to audit procedures and audit reporting relating to
Corresponding Figures and Comparative Financial Statements.
SA 720: The Auditor’s Responsibility in Relation to Other Information in Documents

Containing Audited Financial Statements-This Standard on Auditing (SA) deals with the
auditor’s responsibility regarding other information in documents containing audited financial
statements and the auditor’s report thereon. As per SA 720 the objective of the auditor is to
respond appropriately when documents containing audited financial statements and the auditor’s
report thereon include other information that could undermine the credibility of those financial
statements and the auditor’s report. This SA also deals with the requirements related to reading
other information, material inconsistencies and material misstatements of fact.
SA 800:Special Considerations - Audits of Financial Statements Prepared in Accordance

with Special Purpose Frameworks
This SA deals with special considerations in the application of those SAs to an audit of financial
statements prepared in accordance with a special purpose framework. It does not override the
requirements of the other SAs; nor does it purport to deal with all special considerations that
may be relevant in the circumstances of the engagement. The objective of the auditor, when
applying SAs in an audit of financial statements prepared in accordance with a special purpose
framework, is to address appropriately the special considerations that are relevant to:
(a) The acceptance of the engagement;
(b) The planning and performance of that engagement; and
(c) Forming an opinion and reporting on the financial statements.

Special Considerations—Audits of Single Financial Statements and Specific
SA 805:
Elements, Accounts or Items of a Financial Statement
This SA deals with special considerations in the application of those SAs to an audit of a single
financial statement or of a specific element, account or item of a financial statement. The single
financial statement or the specific element, account or item of a financial statement may be
prepared in accordance with a general or special purpose framework. If prepared in accordance
with a special purpose framework, SA 800 also applies to the audit. It does not apply to the
report of a component auditor, issued as a result of work performed on the financial information
of a component at the request of a group engagement team for purposes of an audit of group
financial statements. Further it does not override the requirements of the other SAs; nor does it
purport to deal with all special considerations that may be relevant in the circumstances of the
engagement.
SA 810: Engagements to Report on Summary Financial Statements

SA 810 deals with the auditor’s responsibilities when undertaking an engagement to report on
summary financial statements derived from financial statements audited in accordance with SAs
by that same auditor.

CHAPTER 2
TYPES OF COMPANY AUDIT
1. AUDIT OF COMPANIES UNDER THE COMPANIES ACT 2013
The Companies Act, 2013 is focused on transparency and disclosure. In the new Act, attempt
has been made to cover each aspect of corporate functioning under audit by prescribing various
types of audits like internal audit and secretarial audit. The various types of audits prescribed
under the Companies Act, 2013 are:
• Statutory Audit
• Internal Audit
• Secretarial Audit
• Cost Audit
2. Statutory Audit
Appointment of Auditors
The provisions of sub-section 1 of section 139 dealing with appointment of auditors can be
briefly stated as under.
• Every company shall, at the first annual general meeting, appoint an individual or a firm
as an auditor who shall hold office from the conclusion of that meeting till the conclusion
of its sixth annual general meeting and thereafter till the conclusion of every sixth
meeting.
• The company shall place the matter relating to such appointment for ratification by
members at every annual general meeting.
• Before the appointment of auditor is made, the written consent of the auditor to such
appointment, and a certificate from him or it that the appointment, if made, shall be in
accordance with the conditions as may be prescribed, shall be obtained from the auditor.
• The certificate shall also indicate whether the auditor satisfies the criteria provided in
section 141.
• The company shall inform the auditor concerned of his or its appointment, and also file
a notice of such appointment with the Registrar within fifteen days of the meeting in
which the auditor is appointed.
• The “appointment” includes reappointment.
Manner and procedure of selection and appointment of auditors
A company shall follow the procedure prescribed under the Rule 3 of the Companies (Audit and
Auditors) Rules, 2014 for the selection and appointment of auditors under section 139(1).

(CA, CS, BSL LLB, Diploma in Corp. laws) Page 2. 1
• A company that is required to constitute an Audit Committee under section 177, such
committee and where such committee is not required, the Board, shall take into
consideration the qualifications and experience of the individual or the firm proposed to
be considered for appointment as auditor and whether such qualifications and experience
are commensurate with the size and requirements of the company.
• While considering the appointment, the Audit Committee or the Board, as the case may
be, shall have regard to any order or pending proceeding relating to professional matters
of conduct against the proposed auditor before the Institute of Chartered Accountants of
India or any competent authority or any Court.
• The Audit Committee or the Board, as the case may be, may call for such other
information from the proposed auditor as it may deem fit.
• Where a company is required to constitute the Audit Committee, the committee shall
recommend the name of an individual or a firm as auditor to the Board for consideration
and in other cases; the Board shall consider and recommend an individual or a firm as
auditor to the members in the annual general meeting for appointment.
• If the Board agrees with the recommendation of the Audit Committee, it shall further
recommend the appointment of an individual or a firm as auditor to the members in the
annual general meeting.
• If the Board disagrees with the recommendation of the Audit Committee, it shall refer
back the recommendation to the committee for reconsideration citing reasons for such
disagreement.
• If the Audit Committee, after considering the reasons given by the Board, decides not to
reconsider its original recommendation, the Board shall record reasons for its
disagreement with the committee and send its own recommendation for consideration of
the members in the annual general meeting; and if the Board agrees with the
recommendations of the Audit Committee, it shall place the matter for consideration by
members in the annual general meeting.
• The auditor so appointment shall be subject to ratification in every annual general
meeting till the sixth such meeting by way of passing of an ordinary resolution. If the
appointment is not ratified by the members of the company, the Board of Directors shall
appoint another individual or firm as its auditor or auditors after following the procedure
laid down in this behalf under the Act.
• The auditor appointed in the annual general meeting shall hold office from the
conclusion of that meeting till the conclusion of the sixth annual general meeting, with
the meeting wherein such appointment has been made being counted as the first meeting:

Conditions for appointment and notice to Registrar
The auditor appointed under Rule 3 the Companies (Audit and Auditors) Rules shall submit a
certificate that -
• the individual or the firm, as the case may be, is eligible for appointment and is not
disqualified for appointment under the Act, the Chartered Accountants Act, 1949 and the
rules or regulations made thereunder;
• the proposed appointment is as per the term provided under the Act;
• the proposed appointment is within the limits laid down by or under the authority of the
Act;
• the list of proceedings against the auditor or audit firm or any partner of the audit firm
pending with respect to professional matters of conduct, as disclosed in the certificate, is
true and correct.
• The notice to Registrar about appointment of auditor under fourth proviso to sub-section
(1) of section 139 shall be in Form ADT-1.
Mandatory Rotation of Auditors

Under the Section 139(2), the system of rotation of auditors has been introduced for the auditors
of listed companies and other class of companies.
The other class of companies (specified companies) shall mean the following classes of
companies excluding one person companies and small companies as prescribed under Rule 5 of
the Companies (Audit and Auditors) Rules.
(a) allunlisted public companies having paid up share capital of rupees ten crore or more;
(b)allprivate limited companies having paid up share capital of rupees twenty crore or
more;
(c) allcompanies having paid up share capital of below threshold limit mentioned in (a) and
(b) above, but having public borrowings from financial institutions, banks or public deposits
of rupees fifty crores or more.
The provisions for rotation of auditors under sub sections 2, 3 and 4 of section 139 are given
below:
• If the auditor is an individual, he cannot be auditor of such a company for more than 5
consecutive years.
• If an audit firm/LLP is auditor of the company, it cannot be auditor of such a company
for more than two terms of 5 consecutive years (i.e. 10 years)
• If an individual auditor who has completed his term of 5 years, shall not be eligible for
reappointment as auditor in same company for 5 years from the completion of his term.

• In an audit firm/LLP which has completed its one term of 10 years, shall not be eligible
for reappointment as auditor in the same company for 5 years from the completion of its
term.
• It may be noted that any firm/LLP which has one or more partners who are also partners
in the outgoing audit firm/LLP cannot be appointed as auditors during this 5 year period.
• There is a transition period of three years, from date of enactment of the 2013 Act, to
comply with this requirement. All listed companies or specified companies will have to
comply with the above provisions relating to rotation of auditors within 3 years from the
date of commencement of this Act i.e. within 31st March 2017.
• However there will be no effect on the right of the company to remove an auditor or the
right of the auditor to resign from such office of the company because of the provisions
mentioned above.
• The members of a company may also provide for the rotation of auditing partner and his
team at specified intervals in the audit firm appointed by the company.
• The members of a company may also provide that the audit shall be conducted by more
than one auditor.
Manner of rotation of auditors by the companies on expiry of their term
A company shall follow the procedure prescribed under the Rule 6 of the Companies (Audit and
Auditors) Rules, 2014 for the rotation of auditors under section 139(2).
• The Audit Committee shall recommend to the Board, the name of an individual auditor
or of an audit firm who may replace the incumbent auditor on expiry of the term of such
incumbent.
• Where a company is required to constitute an Audit Committee, the Board shall consider
the recommendation of such committee, and in other cases, the Board shall itself
consider the matter of rotation of auditors and make its recommendation for appointment
of the next auditor by the members in annual general meeting.
• For the purpose of the rotation of auditors-
(i) in case of an auditor (whether an individual or audit firm), the period for which the
individual or the firm has held office as auditor prior to the commencement of the
Act shall be taken into account for calculating the period of five consecutive years or
ten consecutive years, as the case may be;
(ii) the incoming auditor or audit firm shall not be eligible if such auditor or audit firm is
associated with the outgoing auditor or audit firm under the same network of audit
firms which includes the firms operating or functioning, hitherto or in future, under
the same brand name, trade name or common control.

• For the purpose of rotation of auditors,-
(i) a break in the term for a continuous period of five years shall be considered as
fulfilling the requirement of rotation;
(ii) if a partner, who is in charge of an audit firm and also certifies the financial
statements of the company, retires from the said firm and joins another firm of
chartered accountants, such other firm shall also be ineligible to be appointed for a
period of five years.
Appointment of first auditor:

• According to section 139(6), the first auditor of a company, other than a Government
company, shall be appointed by the Board of Director within thirty days from the date of
registration of the company.
• In the case of failure of the Board to appoint such auditor, it shall inform the members of
the company, who shall within ninety days at an extraordinary general meeting appoint
such auditor and such auditor shall hold office till the conclusion of the first annual
general meeting.
Filling of casual vacancy

Removal of Auditors
New Section 140 provides for Removal, Resignation etc. of Auditors. The procedure
given in this section is more or less similar to the existing procedure in section 225 with
the following difference.
(i) Under new section 140 an auditor can be removed from his office before the expiry of
his term only after obtaining the previous approval of the Central Government and after
passing a Special Resolution by the Members. For this purpose the company will have to
comply with the prescribed rules.
(ii) If an auditor resigns from his office, he is required to file, within 30 days, a statement
in the prescribed form with the company and ROC. In the case of a Government
company, this form is also required to be filed with C& AG. In this statement the auditor
has give reasons and other facts relevant for his resignation. For failure to comply with
this requirement, the auditor is punishable with a minimum fine of Rs. 50,000/ - which
may extend upto Rs. 5 lakh.
(iii) If the auditor is found to have, directly or indirectly, acted in a fraudulent manner or
abetted or colluded in any fraud by the company or any of its officers, the Tribunal can,
on its own or on an application by the company, Central Government or any concerned
person, direct the company to change the auditors. In the case of such an application by
the Central Government for change of Auditors, the Tribunal can, within 15 days, pass an
order that the auditor shall not function as such and the Central Government will be able

to appoint another auditor. The auditor who is removed by the Tribunal cannot be
appointed as an auditor of that company for 5 years. Further, under the new section 447
the auditor who is guilty of fraud will be punishable with imprisonment for a minimum
term of six months which may extend to 10 years and shall also be liable to pay a
minimum fine of an amount involved in the fraud which may extend to 3 times the said
amount. If the fraud involves public interest the minimum period of imprisonment will be
3 years.
• Rules 7 and 8 provide for procedure for removal and resignation of an Auditor.
Qualifications and Disqualifications of Auditors: The section 141 of the Companies Act 2013
deals with the eligibility, qualifications and disqualifications of auditors. This section is similar
to the existing section 226 of the Companies Act 1956. Under the 1956 Act, a Chartered
Accountant holding a certificate of practice or a firm of Chartered Accountants (only) can be
appointed as auditor(s) of a company. The section 141 (1) and (2) of the 2013 Act, in addition,
provides-
• A firm of Chartered Accountants or Limited Liability Partnership (LLP) can be
appointed as an auditor of a company only if majority partners practising in India are
qualified for appointment as an auditor of a company.
• Where a firm including a limited liability partnership is appointed as an auditor of a
company, only the partners who are chartered accountants shall be authorised to act and
sign on behalf of the firm.
The Companies Act 2013 has also made addition in the list of disqualifications of auditors.
According to the section 141 (3) of the Companies Act 2013, the following persons shall not be
eligible for appointment as an auditor of a company:-
(a) a body corporate other than a limited liability partnership registered under the Limited
Liability Partnership Act, 2008;
(b) an officer or employee of the company;
(c) a person who is a partner, or who is in the employment, of an officer or employee of the
company;
(d) a person who, or his relative or partner—
• is holding any security of or interest in the company or its subsidiary, or of its
holding or associate company or a subsidiary of such holding company: Provided that
the relative may hold security or interest in the company of face value not exceeding
rupees one lakh;
• is indebted to the company, or its subsidiary, or its holding or associate company or
a subsidiary of such holding company in excess of rupees five lakh or
• has given a guarantee or provided any security in connection with the indebtedness
of any third person to the company, or its subsidiary, or its holding or associate

company or a subsidiary of such holding company in excess of one lakh rupees.
(e) a person or a firm who, whether directly or indirectly, has business relationship with the
company, or its subsidiary, or its holding or associate company or subsidiary of such
holding company or associate company. The term “business relationship” shall be
construed as any transaction entered into for a commercial purpose, except -
• commercial transactions which are in the nature of professional services permitted to
be rendered by an auditor or audit firm under the Act and the Chartered Accountants
Act, 1949 and the rules or the regulations made under those Acts;
• commercial transactions which are in the ordinary course of business of the
company at arm’s length price - like sale of products or services to the auditor, as
customer, in the ordinary course of business, by companies engaged in the business
of telecommunications, airlines, hospitals, hotels and such other similar businesses.
(f) a person whose relative is a director or is in the employment of the company as a
director or key managerial personnel;
(g) a person who is in full time employment elsewhere or a person or a partner of a firm
holding appointment as its auditor, if such persons or partner is at the date of such
appointment or reappointment holding appointment as auditor of more than twenty
companies;
(h) a person who has been convicted by a court of an offence involving fraud and a period
of ten years has not elapsed from the date of such conviction;
(i) any person whose subsidiary or associate company or any other form of entity, is engaged
as on the date of appointment in consulting and specialised services as provided in
section 144.
A person who is appointed as an auditor of a company incurs any of the disqualifications
mentioned above after his appointment, he shall vacate his office as such auditor and such
vacation shall be deemed to be a casual vacancy in the office of the auditor according to section
141(4) of the Companies Act 2013.
Remuneration of Auditors: According to section 142 of the Companies Act 2013, the
remuneration of the auditor of a company shall be fixed in its general meeting or in the manner
as determined in the general meeting.
• The remuneration of the first auditor appointed by the board may be fixed by the Board.
• The remuneration shall be in addition to the fee payable to an auditor, include the
expenses, if any, incurred by the auditor in connection with the audit of the company and
any facility extended to him but does not include any remuneration paid to him for any
other service rendered by him at the request of the company.

Powers or Rights of Auditors: Section 143(1) provides for powers or rights of auditors. Every
Auditor of a company shall have a right of access at all times to the books of account and
vouchers of the company, whether kept at the registered office of the company or at any other
place and shall be entitled to require from the officers of the company such information and
explanation as he may consider necessary for the performance of his duties as auditor and
amongst other matters inquire into the following matters, namely:—
(a) whether loans and advances made by the company on the basis of security have been
properly secured and whether the terms on which they have been made are prejudicial to
the interests of the company or its members;
(b) whether transactions of the company which are represented merely by book entries are
prejudicial to the interests of the company;
(c) where the company not being an investment company or a banking company,
whether so much of the assets of the company as consist of shares, debentures and other
securities have been sold at a price less than that at which they were purchased by the
company;
(d) whether loans and advances made by the company have been shown as deposits;
(e) whether personal expenses have been charged to revenue account;

(f) where it is stated in the books and documents of the company that any shares have been
allotted for cash, whether cash has actually been received in respect of such allotment,
and if no cash has actually been so received, whether the position as stated in the account
books and the balance sheet is correct, regular and not misleading:
The auditor of a company which is a holding company shall also have the right of access to the
records of all its subsidiaries in so far as it relates to the consolidation of its financial statements
with that of its subsidiaries.
Duties of Auditors: Section 143(2), 143(3) and 143(4) provides for the duties of auditors. The
auditor shall make a report to the members of the company on the accounts examined by him
and on every financial statements which are to be laid before the company in general meeting
and the report shall after taking into account the provisions of this Act, the accounting and
auditing standards and matters which are required to be included in the audit report under the
provisions of this Act or any rules made thereunder or under any order made under sub-section
(11) and to the best of his information and knowledge, the said accounts, financial statements
give a true and fair view of the state of the company’s affairs as at the end of its financial year
and profit or loss and cash flow for the year.

The auditor’s report shall also state -
(a) whether he has sought and obtained all the information and explanations which to the
best of his knowledge and belief were necessary for the purpose of his audit and if not,
the details thereof and the effect of such information on the financial statements;
(b) whether, in his opinion, proper books of account as required by law have been kept by
the company so far as appears from his examination of those books and proper returns
adequate for the purposes of his audit have been received from branches not visited by
him;
(c) whether the report on the accounts of any branch office of the company audited under
sub-section (8) by a person other than the company’s auditor has been sent to him under
the proviso to that sub-section and the manner in which he has dealt with it in preparing
his report;
(d) whether the company’s balance sheet and profit and loss account dealt with in the report
are in agreement with the books of account and returns;
(e) whether, in his opinion, the financial statements comply with the accounting standards;
(f) the observations or comments of the auditors on financial transactions or matters which
have any adverse effect on the functioning of the company;
(g) whether any director is disqualified from being appointed as a director under sub-section
(2) of section 164;
(h) any qualification, reservation or adverse remark relating to the maintenance of accounts
and other matters connected therewith;
(i) whether the company has adequate internal financial controls system in place and the
operating effectiveness of such controls;
Other matters to be included in auditor’s report: The auditor’s report shall also include their
views and comments on the following matters, namely:-
(a) whether the company has disclosed the impact, if any, of pending litigations on its
financial position in its financial statement;
(b) whether the company has made provision, as required under any law or accounting
standards, for material foreseeable losses, if any, on long term contracts including
derivative contracts;
(c) whether there has been any delay in transferring amounts, requiredto be transferred, to
the Investor Education and Protection Fund by the company.
Where any of the matters required to be included in the audit report under this section is
answered in the negative or with a qualification, the report shall state the reasons therefor.

Branch Audit: Section 143(8) provides the provisions for branch audit of companies. These
provisions are-
• If any company has a branch office, the accounts of that office shall be audited either by
the auditor appointed for the company (the company’s auditor) or by any other person
qualified for appointment as an auditor of the company under this Act.
• The branch auditor shall be appointed under section 139.
• If the branch office is situated in a country outside India, the accounts of the branch
office shall be audited either by the company’s auditor or by an accountant or by any
other person duly qualified to act as an auditor of the accounts of the branch office in
accordance with the laws of that country.
• The branch auditor shall prepare a report on the accounts of the branch examined by him
and send it to the auditor of the company who shall deal with it in his report in such
manner as he considers necessary.
Duties and powers of the company’s auditor with reference to the audit of the branch and
the branch auditor:
• The duties and powers of the company’s auditor with reference to the audit of the branch
and the branch auditor shall be same as the duties and powers of the auditors for the audit
of the company under sub section 1 to 4 of section 143.
• The branch auditor shall submit his report to the company’s auditor.
• The provisions of sub-section (12) of section 143 read with rule 12 hereunder regarding
reporting of fraud by the auditor shall also extend to such branch auditor to the extent it
relates to the concerned branch.
Companies (Auditor’s Report) Order, 2015

Section 143(11) of the Companies Act 2013, provides that the Central Government may, in
consultation with the National Financial Reporting Authority, by general or special order, direct,
in respect of such class or description of companies, as may be specified in the order, that the
auditor’s report shall also include a statement on such matters as may be specified therein.
In order to specify the matters to be included in the auditor’s report and in exercise of the powers
conferred by sub-section (11) of section 143 of the Companies Act, 2013 and in supersession of
the Companies (Auditor’s Report) Order, 2003, the Central Government, after consultation with
the Institute of Chartered Accountants of India issued Companies (Auditor’s Report) Order,
2015 on 10th April 2015 which shall come into force on the date of its publication in the Official
Gazette.

Applicability
Every report made by the auditor under section 143 of the Companies Act for the financial year
commencing on or after 1st April, 2014 will be made according to the Companies (Auditor’s
Report) Order, 2015. The order applies to every company except the companies which are
excluded, including a foreign company as defined in section 2(42) of the Companies Act, 2013.
Companies excluded from Companies (Auditor’s Report) Order, 2015
(i) a banking company as defined in clause (c) of section 5 of the Banking Regulation Act,
1949;
(ii) an insurance company as defined under the Insurance Act,1938 ;
(iii) a company licensed to operate under section 8 of the Companies Act;
(iv) a One Person Company as defined under section 2(62) of the Companies Act and a
small company as defined under section 2(85) of the Companies Act;
(v) a private limited company -
 with a paid up capital and reserves not more than rupees fifty lakh and
which does not have loan outstanding exceeding rupees twenty five lakh from any bank
or financial institution and
 does not having a turnover exceeding rupees five crore at any point of time
during the financial year.
Fraud reporting by auditors

Under section 143 (12)1, if an auditor of a company in the course of the performance of his
duties as auditor, has reason to believe that an offence of fraud involving such amount or
amounts as may be prescribed, is being or has been committed in the company by its officers or
employees, the auditor shall report the matter to the Central Government within such time and in
such manner as may be prescribed.
Provided that in case of a fraud involving lesser than the specified amount, the auditor shall
report the matter to the audit committee constituted under section 177 or to the Board in other
cases within such time and in such manner as may be prescribed.
Provided further that the companies, whose auditors have reported frauds under this sub-section
to the audit committee or the Board but not reported to the Central Government, shall disclose
the details about such frauds in the Board’s report in such manner as may be prescribed.
The term “Fraud” as defined under the 2013 Act is very wide and encompasses every act of
omission or commission. “Fraud” in relation to affairs of a company or anybody corporate,
includes any act, omission, concealment of any fact or abuse of position committed by any
person or any other person with the connivance in any manner, with intent to deceive, to gain
undue advantage from, or to injure the interests of, the company or its shareholders or its
creditors or any other person, whether or not there is any wrongful gain or wrongful loss.

Prohibition on the services to be rendered by the auditors
Section 144 provides that an auditor appointed under this Act shall provide to the company only
such other services as are approved by the Board of Directors or the audit committee, as the case
may be, but which shall not include any of the following services rendered directly or indirectly
to the company or its holding company or subsidiary company, namely:-
(a) accounting and book keeping services;
(b) internal audit;
(c) design and implementation of any financial information system;
(d) actuarial services;
(e) investment advisory services;
(f) investment banking services;
(g) rendering of outsourced financial services;
(h) management services; and
(i) any other kind of services as may be prescribed:
This is a new provision and there was no restriction of this type in the Companies Act 1956.
Therefore, an auditor or audit firm who or which has been performing any non-audit services on
or before the commencement of this Act shall comply with the provisions of this section before
the closure of the first financial year after the date of commencement of the Act i.e within 31st
March 2015.
It is also provided in this section that the prohibited non-audit services cannot be rendered by the
following associates of the auditor.
(i) If the auditor is an Individual The Individual himself, his relative any person connected
or associated with him, or any entity in which the Individual has significant influence or
control or whose name or trade mark/brand is used by the Individual.
(ii) If the auditor is a firm or LLP:- Such firm/LLP either itself or through its partner or
through its parent, subsidiary or associate or through any entity in which the firm/LLP or
its partner has significant influence or control or whose name, trade mark or brand is
used by the firm/LLP or any of its partners.
Signing of Audit Reports

Section 145 of the Companies Act 2013, provides that the person appointed as an auditor of the
company shall sign the auditor’s report or sign or certify any other document of the company.
It also provides that the qualifications, observations or comments on financial transactions or
matters, which have any adverse effect on the functioning of the company mentioned in the
auditor’s report shall be read before the company in general meeting and shall be open to
inspection by any member of the company.

Auditors to attend general meeting
Section 146 of the Companies Act 2013, provides that all notices of, and other communications
relating to, any general meeting shall be forwarded to the auditor of the company, and the
auditor shall, unless otherwise exempted by the company, attend either by himself or through his
authorised representative, who shall also be qualified to be an auditor, any general meeting and
shall have right to be heard at such meeting on any part of the business which concerns him as
the auditor.
Auditing Standards and National Financial Reporting Authority (NFRA): The Companies Act,
2013 provides that every auditor shall comply with the auditing standards. The auditing
standards will be prescribed by the Central Government recommended by the Institute of
Chartered Accountants of India in consultation with and after examination of the
recommendations made by the National Financial Reporting Authority. Until any auditing
standards are notified, any standard or standards of auditing specified by the Institute of
Chartered Accountants of India shall be deemed to be the auditing standards.
Under the 2013 Act, National Financial Reporting Authority (NFRA) which replaces existing
National Advisory Committee on Accounting Standards will make recommendations to the
Central Government on laying down auditing and accounting standards applicable to companies.
NFRA will monitor and enforce compliance with auditing standards.
Penal Provisions: Section 147 provides for punishment for contravention of the provisions of
sections 139 to 146. These penalty provisions are as under.
• If a company contravenes any of the provisions of sections 139 to 146 it shall be liable to
pay minimum fine of Rs. 25,000/- which may extend to Rs. five lakh. Further, every
officer who is in default shall be punishable with imprisonment upto one year and
minimum fine of Rs. 10,000/- which may extend to Rs. one lakh or with both.
• If an auditor of a company contravenes any of the provisions of sections 139, 143 144 or
145, the auditor shall be punishable with minimum fine of Rs. 25,000/- which may
extend to Rs. five lakh.
• If it is found that the auditor has contravened the provisions of sections 139, 143 144 or
145, knowingly or willfully with the intention to deceive the company, its share holders,
creditors or tax authorities, he shall be punishable with imprisonment for a term upto one
year and with a minimum fine of Rs. one lakh which may extend upto Rs. 25 lakh.
• If any auditor contravened any of the provisions of sections 139, 143 144 or 145, he
shall be liable to-
 refund the remuneration received by him to the company and
 pay for damages to the company, statutory bodies/authorities or to any other
persons for loss arising out of incorrect or misleading statements of particulars

made in his audit report.
• The Central Government shall, by notification, specify any statutory body or authority
or an officer for ensuring prompt payment of damages to the company or the persons
under clause (ii) of sub-section 3 and such body, authority or officer shall after payment
of damages to such company or persons file a report with the Central Government in
respect of making such damages in such manner as may be specified in the said
notification.
• Where, in case of audit of a company being conducted by an audit firm, it is proved that
the partner or partners of the audit firm has or have acted in a fraudulent manner or
abetted or colluded in any fraud by, or in relation to or by, the company or its directors or
officers, the liability, whether civil or criminal as provided in this Act or in any other law
for the time being in force, for such act shall be of the partner or partners concerned of
the audit firm and of the firm jointly and severally.
Other Penalties on Auditor under Companies Act 2013:

3. INTERNAL AUDIT
Section 138 under Chapter IX of the Companies Act, 2013 contains provisions regarding
internal audit. The provisions regarding internal audit of the company according to section 138
of the Companies Act, 2013 and the Companies (Accounts) Rules, 2014 are discussed below-
Qualifications for the internal auditor: The internal auditor shall either be a chartered
accountant whether engaged in practice or not or a cost accountant, or such other professional as
may be decided by the Board to conduct internal audit of the functions and activities of the
company.
Report of the internal audit: The report of internal audit shall be submitted to the Board of the
company.
Companies required to appoint internal auditor: The following class of companies shall be
required to appoint an internal auditor or a firm of internal auditors, namely:-
(a) every listed company;
(b) every unlisted public company having-
• paid up share capital of fifty crore rupees or more during the preceding financial
year; or
• turnover of two hundred crore rupees or more during the preceding financial year; or
• outstanding loans or borrowings from banks or public financial institutions
exceeding one hundred crore rupees or more at any point of time during the
preceding financial year; or
• outstanding deposits of twenty five crore rupees or more at any point of time during
the preceding financial year; and
(c) every private company having-
• turnover of two hundred crore rupees or more during the preceding financial year; or
• outstanding loans or borrowings from banks or public financial institutions
exceeding one hundred crore rupees or more at any point of time during the
preceding financial year:
Other Provisions:
• All the companies covered under any of the above criteria will have to comply with the
requirements of section 138 and this rule within six months of commencement of such
section.
• The internal auditor may or may not be an employee of the company.
• The Audit Committee of the company or the Board shall, in consultation with the
Internal Auditor, formulate the scope, functioning, periodicity and methodology for
conducting the internal audit.

4. SECRETARIAL AUDIT
The Companies Act 2013 has introduced a new requirement of Secretarial Audit for bigger
companies, which has been prescribed under Section 204 of the Act. The provisions regarding
secretarial audit of the company according to section 204 of the Companies Act, 2013 and the
Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 are
discussed below-
Companies required conducting secretarial audit:

(1) Every listed company and
(2) Company belonging to other class of companies: The other class of companies are
• every public company having a paid-up share capital of fifty crore rupees or
more; or
• every public company having a turnover of two hundred fifty crore rupees or
more.
Qualifications for the secretarial auditor: A Secretarial Audit has to be conducted by a

Practising Company Secretary in respect of the secretarial and other records of the company.
Report of the secretarial audit: A secretarial audit report shall be annexed with the Board’s
report of the company. The Board of Directors, in their report made in terms of sub-section (3)
of section 134, shall explain in full any qualification or observation or other remarks made by
the company secretary in practice in his report under sub-section (1). The format of the
Secretarial Audit Report shall be in Form No.MR.3.
Other Provisions:
• It shall be the duty of the company to give all assistance and facilities to the company
secretary in practice, for auditing the secretarial and related records of the company.
• If a company or any officer of the company or the company secretary in practise,

contravenes the provisions of this section, the company, every officer of the company or
the company secretary in practice, who is in default, shall be punishable with fine which
shall not be less than one lakh rupees but which may extend to five lakh rupees. As per
Section 143(14), all provisions regarding rights, duties and obligations of statutory
auditors shall also apply to Company Secretary in Practice conducting secretarial audit.

5. COST AUDIT
Section 148 of the Companies Act provides that the Central Government may, by order, in
respect of such class of companies engaged in the production of such goods or providing such
services as may be prescribed, direct that particulars relating to the utilisation of material or
labour or to other items of cost as may be prescribed shall also be included in the books of
account kept by that class of companies:
Provided that the Central Government shall, before issuing such order in respect of any class of
companies regulated under a special Act, consult the regulatory body constituted or established
under such special Act.
• If the Central Government is of the opinion, that it is necessary to do so, it may, by
order, direct that the audit of cost records of class of companies, which are covered under
sub-section (1) and which have a net worth of such amount as may be prescribed or a
turnover of such amount as may be prescribed, shall be conducted in the manner
specified in the order.
• The audit under sub-section (2) shall be conducted by a Cost Accountant in practice who
shall be appointed by the Board on such remuneration as may be determined by the
members in such manner as may be prescribed: Provided that no person appointed under
section 139 as an auditor of the company shall be appointed for conducting the audit of
cost records:
Provided further that the auditor conducting the cost audit shall comply with the cost
auditing standards.
“cost auditing standards” mean such standards as are issued by the Institute of Cost and
Works Accountants of India, constituted under the Cost and Works Accountants Act,
1959, with the approval of the Central Government.
• The qualifications, disqualifications, rights, duties and obligations applicable to auditors
under this Chapter shall, so far as may be applicable, apply to a cost auditor appointed
under this section and it shall be the duty of the company to give all assistance and
facilities to the cost auditor appointed under this section for auditing the cost records of
the company: Provided that the report on the audit of cost records shall be submitted by
the cost accountant in practice to the Board of Directors of the company.
• A company shall within thirty days from the date of receipt of a copy of the cost audit
report prepared in pursuance of a direction under sub-section (2) furnish the Central
Government with such report along with full information and explanation on every
reservation or qualification contained therein.
• If, after considering the cost audit report referred to under this section and the
information and explanation furnished by the company under sub-section (6), the Central
Government is of the opinion that any further information or explanation is necessary, it
may call for such further information and explanation and the company shall furnish the

same within such time as may be specified by that Government.
• If any default is made in complying with the provisions of this section,—
(a) the company and every officer of the company who is in default shall be punishable
in the manner as provided in sub-section (1) of section 147;
(b) the cost auditor of the company who is in default shall be punishable in the manner
as provided in sub-sections (2) to (4) of section 147.
6. JOINT AUDIT
Meaning of Joint Audit: when two or more auditors are appointed for the execution of same
audit assignment, it is termed as joint audit. Joint auditors are mainly appointed for audit
assignment of public enterprises and big companies.
Institute of Chartered Accountants of India (ICAI) has issued SA 299 on “Responsibility of Joint
Auditors” w.e.f. April, 1996. Basic principles governing a joint audit are discussed herein given
below
Division of Work - Where joint auditors are appointed, they should, by mutual discussion,
divide the audit work among themselves in terms of audit of identifiable units or specified areas.
If due to the nature of the business of the entity under audit, such a division of work may not be
possible the division of work may be with reference to items of assets or liabilities or income or
expenditure or with reference to periods of time. The division of work among joint auditors as
well as the areas of work to be covered by all of them should be adequately documented and
preferably communicated to the entity.
Coordination - Where, in the course of his work, a joint auditor comes across matters which are
relevant to the areas of responsibility of other joint auditors and which deserve their attention, or
which require disclosure or require discussion with, or application of judgement by, other joint
auditors, he should communicate the same to all the other joint auditors in writing. Thus should
be done by the submission of a report or note prior to the finalisation of the audit.
Relationship among joint auditors - In respect of audit work divided among the joint auditors,
each joint auditor is responsible only for the work allocated to him, whether or not he has
prepared as separate report on the work performed by him. On the other hand, all the joint
auditors are jointly and severally responsible:
(a) In respect of the audit work which is not divided among the joint auditors and is carried
out by all of them;
(b) In respect of decisions taken by all the joint auditors concerning the nature, timing or
extent of the audit procedures to be performed by any of the joint auditors.

It may, however, be clarified that all the joint auditors are responsible only in respect of
the appropriateness of the decisions concerning the nature, timing or extent of the audit
procedures agreed upon among them; proper execution of these audit procedures is the
separate and specific responsibility of the joint auditor concerned;
(c) In respect of matters which are brought to the notice of the joint auditors by any one of
them and on which there is an agreement among the joint auditors;
(d) For examining that the financial statements of the entity comply with the disclosure
requirements of the relevant statute; and
(e) For ensuring that the audit report complies with the requirements of the relevant statute.
If any matters of the nature referred above are brought to the attention of the entity or other joint
auditors by an auditor after the audit report has been submitted, the other joint auditors would
not be responsible for those matters. Subject to paragraph (b) above, it is the responsibility of
each joint auditor to determine the nature, timing and extent of audit procedures to be applied in
relation to the area of work allocated to him; The issues such as appropriateness of using test
checks or sampling should be decided by each joint auditor in relation to his own area of work.
This responsibility is not shared by the other joint auditors.
Thus, it is the separate and specific responsibility of each joint auditor to study and evaluate the
prevailing system of internal control relating to the work allocated to him. Similarly, the nature,
timing and extent of the enquiries to be made in the course of audit as well as the other audit
procedures to be applied are solely the responsibility of each joint auditor. In the case of audit of
a large entity with several branches, including those required to be audited by branch auditors,
the branch audit reports/returns may be required to be scrutinised by different joint auditors in
accordance with the allocation of work. In such cases, it is the specific and separate
responsibility of each joint auditor to review the audit reports/returns of the divisions/branches
allocated to him and to ensure that they are properly incorporated into the accounts of the entity.
In respect of the branches which do not fall within any divisions or zones which are separately
assigned to the various joint auditors, they may agree among themselves as regards the division
of work relating to the review of such branch returns. It is also the separate and specific
responsibility of each joint auditor to exercise his judgement with regard to the necessity of
visiting such divisions/branches in respect of which the work is allocated to him. A significant
part of the audit work involves obtaining and evaluating information and explanations from the
management. This responsibility is shared by all the joint auditors unless they agree upon a
specific pattern of distribution of this responsibility. In cases where specific responsibility of
each joint auditor to obtain appropriate information and explanations from the management in
respect of such divisions/zones/units and to evaluate the information and explanations so
obtained by him.

Each joint auditor is entitled to assume that the other joint auditors have carried out their part of
the audit work in accordance with the generally accepted audit procedures. It is not necessary for
a joint auditor to review the work performed by other joint auditors or perform any tests in order
to ascertain whether the work has actually been performed in such a manner. Each joint auditor
is entitled to rely upon the other joint auditors for bringing to his notice accounting principles or
any material error noticed in the course of the audit. Where separate financial statements of a
division/branch are audited by one of the joint auditors, the other joint auditors are entitled to
proceed on the basis that such financial statements comply with all the legal and professional
requirements regarding the disclosures to be made and present a true and fair view of the state of
affairs and of the working results of the division/branch concerned, subject to such observations
as may be communicated by the joint auditor concerned.
Reporting Responsibilities - Normally, the joint auditors are able to arrive at an agreed report.
However, where the joint auditors are in disagreement with regard to any matters to be covered
by the report, each one of them should express his own opinion through a separate report. A
joint auditor is not bound by the view of the majority of the joint auditors regarding matters to be
covered in the report and should express his opinion in a separate report in case of a
disagreement. For the purpose of computation of the number of company audits held by an
auditor pursuant to the ceiling rule introduced in the Companies Act, 1956 each joint auditor
ship in a company will be counted as one unit
7. CAG AUDIT
CAG Audit is known as audit of public enterprises done by Comptroller and Auditor General of
India and here we will be discussing about Government Audit as CAG audit.
In India, government audit is performed by an independent constitutional authority, i.e.
Comptroller and Audit General of India (C&AG), through the Indian Audit and Accounts
Department. The Constitution of India gives a special status to the C&AG and contains
provisions to safeguard his independence. Article 148 of the constitution provides that the
C&AG shall be appointed by the President and can be removed from the office only in a like
manner and on the like grounds as a judge of the Supreme Court. Article 151 of the Constitution
requires that the audit reports of the C&AG relating to the accounts of the Central/State
Government should be submitted to the President/Governor of the State who shall cause them to
be laid before Parliament/State Legislative.
The Comptroller and Audit General’s (Duties, Power and Conditions of Services) Act, 1971,
prescribes that the C&AG shall hold office for a term of six years or upto the age of 65 years,
which is earlier. He can resign at any time through a resignation letter addressed to the President.
The Act also assigns the duties regarding the audit to be followed by C&AG.
Organizations subject to the audit of the Comptroller and Auditor General of India
The organisations subject to the audit of the Comptroller and Auditor General of India are:- All
the Union and State Government departments and offices including the Indian Railways and
Posts and Telecommunications.
- About 1500 public commercial enterprises controlled by the Union and State
governments, i.e. government companies and corporations.
- Around 400 non-commercial autonomous bodies and authorities owned or controlled by
the Union or the States.
- Over 4400 authorities and bodies substantially financed from Union or State revenues
Audit of Government Companies (Commercial Audit)

There is a special arrangement for the audit of companies where the equity participation by
Government is 51 percent or more. The primary auditors of these companies are Chartered
Accountants, appointed by the Comptroller and Auditor General of India, who gives the
directions to the auditors on the manner in which the audit should be conducted by them. The
Comptroller and Auditor General of India is also empowered to comment upon the audit reports
of the primary auditors. In addition, the Comptroller and Auditor General of India conducts a
test audit of the accounts of such companies and reports the results of his audit to Parliament and
State Legislatures.
Nature of Audit
While fulfilling his Constitutional obligations, the Comptroller & Auditor General examines
various aspects of Government expenditure. The audit done by C&A G is broadly classified into
Regularity Audit and Performance Audit.
Regularity Audit (Compliance)
- Audit against provision of funds to ascertain whether the moneys shown as expenditure
in the Accounts were authorized for the purpose for which they were spent.
- Audit against rules and regulation to see that the expenditure incurred was in conformity
with the laws, rules and regulations framed to regulate the procedure for expending
public money.
- Audit of sanctions to expenditure to see that every item of expenditure was done with
the approval of the competent authority in the Government for expending the public
money.
- Propriety Audit which extends beyond scrutinizing the mere formality of expenditure to it
wisdom and economy and to bring to light cases of improper expenditure or waste of
public money.

While conducting the audit of receipts of the Central and State Governments, the Comptroller &
Auditor General satisfies himself that the rules and procedures ensure that assessment, collection
and allocation of revenue are done in accordance with the law and there is no leakage of revenue
which legally should come to Government.
Regularity Audit (Financial)

In regularity (financial) audit and in other types of audit when applicable, auditors analyze the
financial statements to establish whether acceptable accounting standards for financial reporting
and disclosure are complied with. Analysis of financial statements is performed to such a degree
that a rational basis is obtained to express an opinion on financial statements.
Performance Audit
Performance audit is done to see that Government programmes have achieved the desired
objectives at lowest cost and given the intended benefits.
Action on Audit Reports

The Annual Accounts and the Audit Reports of public enterprises and government companies
are scrutinized by the Parliament. Since parliament has limited time for discussion on the issue
of national importance, therefore the Parliament and the State Legislatures have, constituted
specialized Committees like the Public Accounts Committee (PAC) and the Committee on
Public Undertakings (COPU) for review and scrutiny of audit Reports and Annual Accounts of
public enterprises and government companies
Public Accounts Committee

The Committee on Public Accounts is constituted by Parliament each year for examination of
accounts showing the appropriation of sums granted by Parliament for expenditure of
Government of India, the annual Finance Accounts of Government of India, and such other
Accounts laid before Parliament as the Committee may deem fit, such as accounts of
autonomous and semi-autonomous bodies (except those of Public Undertakings and Government
Companies which come under the purview of the Committee on Public Undertakings).
Constitution of the Committee

The Committee consists of not more than 22 members comprising 15 members elected by Lok
Sabha every year from amongst its members according to the principle of proportional
representation by means of single transferable vote and not more than 7 members of Rajya
Sabha elected by that House in like manner are associated with the Committee. The Chairman is
appointed by the Speaker from amongst its members of Lok Sabha. The Speaker, for the first
time, appointed a member of the Opposition as the Chairman of the Committee for 1967-68.
This practice has been continued since then. A Minister is not eligible to be elected as a member
of the Committee.

If a member, after his election to the Committee is appointed a Minister, he ceases to be a
member of the Committee from the date of such appointment.
The Public Accounts Committee satisfies itself:-
(a) that the money shown in the accounts as having been disbursed were legally available
for, and applicable to the service or purpose to which they have been applied or charged;
(b) that the expenditure conforms to the authority which governs it; and
(c) That every re-appropriation has been made in accordance with the provisions made in
this behalf under rules framed by the competent authority.
It is also the duty of the PAC to examine the statement of accounts of autonomous and semi-
autonomous bodies, the audit of which is conducted by the Comptroller & Auditor General
either under the directions of the President or by a Statute of Parliament.
Committee on Public Undertakings

The Committee on Public Undertakings exercises the same financial control on the public sector
undertakings as the Public Accounts Committee exercises over the functioning of the
Government Departments. The functions of the Committee are:-
(a) To examine the reports and accounts of public undertakings.
(b) To examine the reports of the Comptroller & Auditor General on public undertakings.
(c) To examine the efficiency of public undertakings and to see whether they are being
managed in accordance with sound business principles and prudent commercial
practices.
The examination of public enterprises by the Committee takes the form of comprehensive
appraisal or evaluation of performance of the undertaking. It involves a thorough examination,
including evaluation of the policies, programmes and financial working of the undertaking.
The objective of the Financial Committees, in doing so, is not to focus only on the individual
irregularity, but on the defects in the system which led to such irregularity, and the need for
correction of such systems and procedures.
CAG’s Role in functioning of financial committees of Parliament

The Comptroller & Auditor General of India plays a key role in the functioning of the financial
committees of Parliament and the State Legislatures. He has come to be recognised as a ‘friend,
philosopher and guide’ of the Committee. His Reports generally form the basis of the
Committees’ working, although they are not precluded from examining issues not brought out in
his Reports. He scrutinizes the notes which the Ministries submit to the Committees and helps
the Committees to check the correctness submit to the Committees and helps the Committees to
check the correctness of facts and figures in their draft reports.

The Financial Committees present their Report to the Parliament/ State Legislature with their
observations and recommendations. The various Ministries / Department of the Government are
required to inform the Committees of the action taken by them on the recommendations of the
Committees (which are generally accepted) and the Committees present Action Taken Reports
to Parliament / Legislature.
In respect of those cases in Audit Reports, which could not be discussed in detail by the
Committees, written answers are obtained from the Department / Ministry concerned and are
sometimes incorporated in the Reports presented to the Parliament / State Legislature. This
ensures that the audit Reports are not taken lightly by the Government, even if the entire report
is not deliberated upon by the Committee.
Where, in any financial year, the accounts of the branch office of a company have not been
audited by an auditor mentioned in sub-section (1) of section 228, the auditor of the company
shall expressly state in the audit report that the branch office is exempt from the requirements of
section 228 by virtue of rule 3 or that an exemption has een granted under rule 4.
Revocation of exemption.-
The Central Government may, after giving the company reasonable opportunity to make its
objections, revoke an exemption granted under these rules, if-
(a) there has been a contravention of any of the terms and conditions subject to which the
exemption was granted;
(b) there has been a material alteration in the circumstances relating to the scrutiny, check or
audit of the accounts of the branch office on the basis of which the exemption was
granted ; and
for any other reason, the Central Government is satisfied that the exemption is no longer
necessary or justified.

CHAPTER 3
INTERNAL AUDIT
There are various forms of auditing exercise. In many cases, audit is prescribed by relevant
statutes i.e. Companies Act, 2013, Income Tax Act, 1961, otherwise, audit can be carried out at
the discretion of management. Here we would be discussing mainly Internal Audit, its features,
its role. Other than this first let us discuss Propriety Audit, Compliance Audit and Efficiency
Audit.
1. PROPRIETY AUDIT
Propriety Audit carry out to check, mean whether the transactions have been done in conformity
with established rules, principles and established standard.
The Propriety Audit means the verification of following main aspects to find out whether:
(i) Proper recording has been done in appropriate books of accounts.
(ii) The assets have not been misused and have been properly safeguarded.
(iii) The business funds have been utilized properly.
(iv) The concern is yielding the expected results.
The system of Propriety Audit is applied in respect to Government companies, Government

Department because public money and public interest are involved therein.
It is of equal importance to ensure that the broad principles of orthodox finance are borne in
mind not only by disbursing officers but also by sanctioning authorities.
2. COMPLIANCE AUDIT
A compliance audit is a comprehensive review of an organization’s adherence to regulatory
guidelines.
What, precisely, is examined in a compliance audit will vary depending upon whether an
organization is a public or private company, what kind of data it handles and if it transmits or
stores sensitive financial data.
It is common to us that the business undertakings require some certified statement on various
matters and the auditors certify such statements after carrying out audit which might be
necessary under the particular cases. All such audits are called Compliance Audit. Suppose
when a company applies to a bank for some loan, a certified statement showing the turnover of
the company for the past two or three years along with the current year might be necessary, and
for this purpose the certified statements are to be attached with the application, otherwise the
application will be rejected. So these certified statements showing the turnover of the company
fall under the category of compliance audit. Internal audit for compliance could be more broad
base to include compliance with documented procedures/policies, compliance with statutory
requirements in the relevant areas etc.
Objectives of Compliance Audit
The objective of a compliance audit is to determine whether the auditee is following prescribed
laws, regulations, policies, or procedures. These audits can be performed within a business
organization for internal purposes or in response to requirements by outside groups, particularly
government.
Benefits of Compliance Audit

1 Adherence to the established standards.
.2
Improvement of internal processes and technologie
.S Maintenance of Certifications.
S
4 Adherence to governmental regulations.
3.
5 Cost recovery.
.
.6 Elevate fraud awareness and deter fraudulent
.7 activity.
Manage contract areas of risk.
.
THE COMPLIANCE AUDIT PROCESS

3. EFFICIENCY AUDIT
In essence, efficiency indicates how well an organization uses its resources to produce goods
and services. It focuses on resources (inputs), goods and services (outputs), and the rate
(productivity) at which inputs are used to produce or deliver the outputs. To understand the
meaning of “efficiency”, it is necessary to understand the following terms: inputs, outputs
(including quantity and quality), productivity, and level of service.
Inputs are resources (e.g., human, financial, equipment, material, facilities, information, energy
and land) used to produce outputs.
Outputs are goods and services produced to meet client needs. Outputs are defined in terms of
quantity and quality and are delivered within parameters relating to level of service.
Quantity refers to the amount, volume, or number of outputs produced.
Quality refers to various attributes and characteristics of outputs such as reliability, accuracy,
timeliness, service courtesy, safety, and comfort.
Productivity is the ratio of the amount of acceptable goods and services produced (outputs) to
the amount of resources (inputs) used to produce them. Productivity is expressed in the form of a
ratio such as cost or time per unit of output.
Efficiency audit refers to comparing the actual results with the desired/projected results. It is
directed towards the measurement of whether plans have been effectively executed. It is
concerned with the utilisation of the resources in economic and most remunerative manner to
achieve the objectives of the concern. It comprises of studying the plans of organisation,
comparing actual performance with plans and investigating the reasons for variances to take
remedial action
OBJECTIVES OF EFFICIENCY AUDIT

The objectives of auditing efficiency can include assessing one or more of the following:
 the level of efficiency achieved by an organization or operation in relation to reasonable
standards;
 the adequacy and reliability of systems or procedures used to measure and report
efficiency;
 an organization’s efforts to explore and exploit opportunities to improve efficiency; and
 whether the management processes and information systems, operational systems, and
practices of an organization help to achieve efficiency.
Advantages of Efficiency Audit

Auditing efficiency enables the management/owner to know whether the departments and
agencies manage resources with due regard to efficiency. It can also directly or indirectly help
departments and agencies to identify opportunities to provide more or better services at the same
or lower cost. More specifically, such audits can:

 help managers and staff to be more sensitive to their obligation of due regard to
efficiency;
 underline the importance of measuring efficiency and of using that information for
managing operations and providing accountability;
 identify means for improving efficiency, even in operations where efficiency is difficult
to measure;
 demonstrate the scope for lowering the cost of delivering programs without reducing the
quantity or quality of outputs or the level of service;
 increase the quantity or improve the quality of outputs and level of service without
increasing spending; and
 identify needed improvements in existing controls, operational systems, and work
processes for better use of resources.
4. INTERNAL AUDIT
Internal audit activity provides assurance that internal controls in place are adequate to mitigate
the risks, governance processes are effective and efficient, and organizational goals and
objectives are met
As per The Institute of Internal Auditors (IIA):
Internal Auditing is an independent, objective assurance and consulting activity designed to add
value and improve an organization’s operations. It helps an organization accomplish its
objectives by bringing a systematic, disciplined approach to evaluate and improve the
effectiveness of risk management, control, and governance processes.
5. NATURE OF INTERNAL AUDIT
1. A Management tool: Internal Audit is management tool performed by the employees of
the organisation or the engaged professional firm to check the appropriateness of internal
checks and control in the organisation. The reporting authority is generally board of
directors and audit committee.
2. A continuous Exercise: Internal Audit is a continuous and systematic process of
examining and reporting the operations and records of a concern by its employees or
external agencies specially assigned for this purpose. It is, in essence, auditing for the
management and its scope may vary depending upon the nature and size of the concern.
3. A Control System: It is a control system concerned with examination and appraisal of
other control mechanisms.
4. A Risk Management Tool: The internal audit work encompasses fostering the creation
of a risk management process and ensuring it addresses key objectives, and the
subsequent evaluation of the process. The internal audit work also encompasses an

identical role in the creation and subsequent evaluation of, the business continuity
planning process, and the information security and privacy system.
6. SCOPE OF INTERNAL AUDIT
The Institute of Internal Auditors defines scope of internal auditing as ‘The examination and
evaluation of the adequacy and effectiveness of organization’s system of internal control and the
quality of actual performance’.
On the analysis of above, it can be argued that internal auditing is concerned with an evaluation
of both internal control as well as the quality of actual performance. According to The Institute
of Internal Auditors, internal audit involves five areas of operations, which can be discussed as
follows:
1. Reliability and Integrity of Financial and Operating Information: - Internal Auditors
should review the reliability and integrity of financial and operating information and the
means used to identify, measure, classify and report such information.
2. Economical and Efficient Use of Resources: - Internal Auditor should ensure the
economic and efficient use of resources available.
3. Compliance with Laws, Policies, Plans, Procedures, and Regulations: - Internal Auditor
should review the systems established to ensure compliance with those policies, plans
and procedures, law and regulations which could have a significant impact on operations
and should determine whether the organization is in compliance thereof.
4. Accomplishment of Established Goals for Operations: - Internal Auditor should review
operations, programmes to ascertain whether results are consistent with established
objectives and goals and whether the operations or programmes are being carried out as
planned.
5. Safeguarding of Assets: - Internal Auditor should verify the existence of assets and
should review means of safeguarding assets.
7. Techniques of Internal Audit

An Internal auditor uses Internal Audit tools/techniques to ensure that controls, processes and
policies are adequate and effective, and that they adhere to industry practices and regulatory
mandates. An internal auditor also checks a corporation’s financial statements to ensure that
such reports are prepared in accordance with generally accepted accounting principles. The
techniques which are often used by an internal auditor are discussed herein.
8. Review of Operating Environment

For carrying out the audit effectively, it is necessary for an internal auditor to understand how
the company operates. He determines it by referring to departmental employees, external
auditors report, and risk specialists. A firm’s operating environment describes management’s
ethical qualities, leadership style and business practices. An internal auditor also could
determine how a corporation operates by evaluating industry trends and regulations.

9. Review Controls
An internal auditor determines how a company’s segment or departmental controls operate by
reading prior audit reports or working papers and by inquiring from segment employees who
perform such controls on a regular basis. An auditor applies generally accepted auditing
standards (GAAS) to detect mechanisms, procedures, tools and methodologies that build
controls.
10. Test Controls

An internal auditor tests a business organization’s controls, policies and guidelines to ensure that
such controls are adequately designed and are operating effectively. Controls are mechanisms
and methodologies a corporation’s management puts into place to prevent losses due to error,
fraud, theft or breaks in technology systems. Effective controls remedy deficiencies and
problems properly. Controls are adequate if they provide detailed step-by-step procedures and
guidelines for task performance, decision-making processes and lines of hierarchy.
11. Account Details

An internal auditor performs tests of account details to ensure that financial statements of a
business entity are not “materially misstated.” Tests of account details and account balances are
referred to as substantive tests. An auditor conducts such tests if a firm’s controls and processes
are not adequate or not functioning properly. “Material” means significant or substantial in
accounting and audit parlance; a misstatement could result from human errors, intentional fraud
or technology system weaknesses.
The above list is not exhaustive and other techniques may also be used by an Internal Auditor
in the internal audit exercise.
12. INTERNAL AUDIT PROCESS

13. INTERNAL AUDIT PROCESS (stepwise approach)
14. WHY INTERNAL AUDIT IS REQUIRED/ADVANTAGES OF INTERNAL AUDIT

15. LIMITATION OF INTERNAL AUDIT
Despite numerous benefits, internal audit has got some limitations.
1. The installation and operation of internal audit involve extra expenditure which cannot
be met by many small concerns. As a matter of fact, internal audit is confined to larger
business.
2. The limitation of internal audit starts when there is time lag between recording and
checking of entries. The accounting and internal audit must go side by side with
minimum time gap
3. Internal audit becomes as better as it is used by managers. There are occasions when
managers cannot accept the finding of internal audit and take consequent actions. This
defect arises mainly from the deficiencies of the internal auditing staff, because of their
advisory staff position, unfamiliarity with operating aspects of work and accounting bias,
internal auditors fail to be of any real help to the manager in many cases.
4. Internal audits are employed by the organization and this can be impair their
independence and objectivity and ability to report fraud/error to senior management
because of perceived threats to their continued employment within the company to
ensure the transparency. Best practice indicates that the internal audit should report both
to management and those charged with governance (audit committee).
5. Internal auditors are not required to be professionally qualified and so there may be
limitations in their knowledge and technical expertise.
16. FUNCTIONS AND RESPONSIBILITIES OF INTERNAL AUDITORS

“Internal auditing is an independent, objective assurance and consulting activity designed to add
value and improve an organisation’s operations. It helps an organisation in accomplishing its
objectives by bringing a systematic, disciplined approach to evaluate and improve the
effectiveness of risk management, control, and governance processes.”
Major roles and responsibilities of internal auditor are summarized below
1. To work with board and management to ensure that a system is in place which ensures
that all major risks are identified and analyzed. Evaluate and provide reasonable
assurance that risk management, control, and governance systems are functioning as
intended and will enable the organisation’s objectives and goals to be met.
2. To plan, organize and carry out the internal audit function including the preparation of
an audit plan which fulfils the responsibility of the department, scheduling and assigning
work and estimating resource needs.
3. Report risk management issues and internal controls deficiencies identified directly to
the audit committee and provide recommendations for improving the organisation’s
operations, in terms of both efficient and effective performance.
4. Evaluation of information security and associated risk exposures. Evaluation of the

organisation’s readiness in case of business interruption.
5. Evaluation of regulatory compliance program with consultation from legal counsel.
6. Maintain open communication with management and the audit committee. Team with
other internal and external resources as appropriate. Engage in continuous education and
staff development. To report to both the audit committee and management on the
policies, programmed and activities of the department.
7. Provide support to the company’s anti-fraud programs.
8. To coordinate coverage with the external auditors and ensure that each party is not only
aware of the other’s work but also well briefed on areas of concern.
9. To make recommendations on the systems and procedures being reviewed, report on the
findings and recommendations and monitor management’s response and implementation.
10. To review and report on the accuracy, timeliness and relevance of the financial and other
information that is provided for management.
17. Organisational Status of Internal Auditing Function
18. Terms of reference

The overall status and remit of internal audit should be formalized in terms of reference it is
often referred to as an audit charter, and approved by the board, normally through the audit
committee. These should then be communicated to relevant people within the organisation.
Internal audit’s terms of reference or charter should provide clarity about its:
 Strategy and objectives;
 Role and responsibilities within the organisation;
 Scope of work;
 Accountability to the audit committee;
 Reporting lines for line management purposes;
 Accessibility to the board and the audit committee; and
 Unfettered access to all information, people and records across the organisation.

The terms of reference should make it clear that internal audit should not be put in a position
where it has to review its own work.
19. INTERNAL AUDIT STATUS VIS-A-VIS STATUTORY AUDIT

Relationship between internal auditor and statutory auditor.
Statutory Auditor and Internal Auditor both are independent entity. A statutory Auditor of a
company cannot be the internal auditor of the same company. In certain cases, statutory auditor
refers the report of internal auditor and he expresses his opinion based on the report of internal
auditor. Similarly in certain cases, internal auditor also refers the report of statutory auditors.
The relationship between statutory auditor and internal auditor may be summed up as given
below:
 Comment on the Internal Audit System in place: the statutory auditor has to comment
upon the effectiveness and suitability of internal audit system laid down by the management. To
discharge this responsibility statutory auditor should evaluate the internal audit system. He
should evaluate the strength of the internal audit staff, their qualification and experience.
 Evaluation of the actual work of internal auditor: After studying the internal audit
system and structure actual work of the internal auditor should also be evaluated. Statutory
auditor has to make use of the work of internal auditor. This he can do only when he himself
puts faith in the work of internal auditor.
 Relying on the work of internal auditor: Statutory auditor has to decide that up to
what extant he can rely upon the work of the internal auditor. This will decide the extent of
checking by statutory auditor. If he feels that internal auditor has properly done his work he can
reduce the extent of his checking.
 No reduction in responsibility: Relying on work of internal auditor in no way reduces
the responsible for the discharge of his duties as statutory auditor. Relying on the internal auditor
can only reduce the burden of the statutory auditor. For all his works statutory auditor would
remain responsible.
20. Difference between Internal Audit and Statutory Audit

There are some differences between statutory audit and internal audit. The details are as given
below:
1. Appointment: Internal Auditor is appointed by the management of the organization while
the statutory auditor is appointed by owners i.e. shareholder for a company. First statutory
auditors of a company are appointed by the board of directors.
2. Qualification: Qualifications of the statutory auditor are prescribed in the Companies
Act, 1956. In case of a company, a practicing chartered Accountants or a firm of practicing
chartered Accountants can only be appointed as a statutory auditor. There are no fixed
qualifications for the position of an internal auditor.

3. Objects: The main object of the statutory audit is to form an opinion on the financial
statement of the organization. Auditor has to state that whether the financial statements are
showing the true and fair view of the affairs of the organization or not. The main object of the
internal audit is to detect and prevent the errors and frauds.
4. Scope: The scope of the statutory audit is fixed by the Companies Act, 1956. It cannot
be changed by mutual consent between the auditor and the management of the audited business
unit. The scope of the internal audit is fixed by the mutual consent of the auditor and the
management of the unit under audit.
5. Report: The statutory auditor submits his report to the shareholder of the company in its
general meeting. The internal auditor submits his report to the management of the company who
is also his appointing authority.
6. Removal: The procedure of removal of the statutory auditor is very complex. Only the
company in the general meeting can remove the auditor. It also has to take the permission of the
central government. The management of the entity can early remove internal auditor. No
permission of Central Government is require.
21. ROLE OF INTERNAL AUDIT IN DIFFERENT AREAS
Role of Internal Audit in Internal Control

The Internal auditor should examine and contribute to the ongoing effectiveness of the internal
control system through evaluation and recommendations. However, the internal auditor is not
vested with management’s primary responsibility for designing, implementing, maintaining and
documenting internal control. Internal audit functions add value to an organization’s internal
control system by bringing a systematic, disciplined approach to the evaluation of risk and by
making recommendations to strengthen the effectiveness of risk management efforts. The
internal auditor should focus towards improving the internal control structure and promoting
better corporate governance. The role of the internal auditor encompasses:
 Evaluation of the efficiency and effectiveness of controls
 Recommending new controls where needed or discontinuing unnecessary controls
 Using control frameworks
 Developing Control self-assessment
Role of Internal Audit in risk management

Internal auditing professional standards require the function to monitor and evaluate the
effectiveness of the organization’s Risk management processes. Risk management relates to how
an organization sets objectives, then identifies, analyzes, and responds to those risks that could
potentially impact its ability to realize its objectives.
Under the COSO Enterprise Risk Management (ERM) Framework, risks fall under strategic,
operational, financial reporting, and legal/regulatory categories. Management performs risk
assessment activities as part of the ordinary course of business in each of these categories.

Examples include: strategic planning, marketing planning, capital planning, budgeting, hedging,
incentive payout structure, and credit/lending practices. Sarbanes-Oxley regulations also require
extensive risk assessment of financial reporting processes. Corporate legal counsel often
prepares comprehensive assessments of the current and potential litigation a company faces.
Internal auditors may evaluate each of these activities, or focus on the processes used by
management to report and monitor the risks identified. For example, internal auditors can advise
management regarding the reporting of forward-looking operating measures to the Board, to
help identify emerging risks.
In larger organizations, major strategic initiatives are implemented to achieve objectives and
drive changes. As a member of senior management, the Chief Audit Executive (CAE) may
participate in status updates on these major initiatives. This places the CAE in the position to
report on many of the major risks the organization faces to the Audit Committee, or ensure
management’s reporting is effective for that purpose.
Role of Internal Audit in corporate governance

Internal auditing activity as it relates to corporate governance is generally informal,
accomplished primarily through participation in meetings and discussions with members of the
Board of Directors. Corporate governance is a combination of processes and organizational
structures implemented by the Board of Directors to inform, direct, manage, and monitor the
organization’s resources, strategies and policies towards the achievement of the organizations
objectives. The internal auditor is often considered one of the “four pillars” of corporate
governance, the other pillars being the Board of Directors, management, and the external
auditor.
A primary focus area of internal auditing as it relates to corporate governance is helping the
Audit Committee of the Board of Directors (or equivalent) perform its responsibilities
effectively. This may include reporting critical internal control problems, informing the
Committee privately on the capabilities of key managers, suggesting questions or topics for the
Audit Committee’s meeting agendas, and coordinating carefully with the external auditor and
management to ensure the Committee receives effective information.

CHAPTER 4
INTERNAL CONTROL
Internal control is broadly defined as a process, effected by an entity’s board of directors,
management and other personnel, designed to provide reasonable assurance regarding the
achievement of objectives in the following categories:
1. Effectiveness and efficiency of operations.
2. Reliability of financial reporting.
3. Compliance with applicable laws and regulations.
1. Definitions of Internal Control

The international standards of auditors define internal controls as a system comprising of
controls environment and procedures. It includes polices and ways adapted by management of
an enterprise to assist it in achieving its objectives.
2. Nature of Internal control
Internal controls can be detective, corrective, or preventive by nature.
1. Detective controls are designed to detect errors or irregularities that may have occurred.
2. Corrective controls are designed to correct errors or irregularities that have been
detected.
3. Preventive controls, on the other hand, are designed to keep errors or irregularities from
occurring in the first place.
3. SCOPE OF INTERNAL CONTROL SYSTEM
It is very important to have an internal control system for an organisation. There is no universal
model of internal control, system. It is up to every company to design an internal control system
which is suitably adapted to its situation. Internal control is neither limited to a set of procedures
nor to financial controls. Operational control such as quality control, work standards, budgetary
control, periodic reporting, policy appraisal, quantitative controls etc are all parts of internal
control system.
4. INTERNAL CONTROL OBJECTIVES
Internal audit evaluates the organisation’s system of internal control by accessing the ability of
individual process controls to achieve seven pre-defined control objectives. The control
objectives include:
Authorization - the objective is to ensure that all transactions are approved by responsible
personnel in accordance with their specific or general authority before the transaction is
recorded.
Completeness - the objective is to ensure that no valid transactions have been omitted from the
accounting records.
Accuracy - the objective is to ensure that all valid transactions are accurate, consistent with the
originating transaction data, and information is recorded in a timely manner.
Validity - the objective is to ensure that all recorded transactions fairly represent the economic
events that actually occurred, are lawful in nature, and have been executed in accordance with
management’s general authorization.
Physical Safeguards and Security - the objective is to ensure that access to physical assets and
information systems are controlled and properly restricted to authorized personnel.
Error Handling - the objective is to ensure that errors detected at any stage of processing
receive prompts corrective action and are reported to the appropriate level of management.
Segregation of Duties - the objective is to ensure that duties are assigned to individuals in a
manner that ensures that no one individual can control both the recording function and the
procedures relative to processing a transaction.
5. INTERNAL CONTROL ELEMENTS
Internal control consists of five interrelated components. These are derived from the way
management runs a business, and are integrated with the management process. Although the
components apply to all entities, small and mid-size companies may implement them differently
than large ones. Its controls may be less formal and less structured, yet a small company can still
have effective internal control. The components are:
Control Environment
Risk Assessment
Control Activities
Information and Communication
Monitoring

6. ADVANTAGES OF INTERNAL CONTROL SYSTEM
 Increase in operational efficiency

One advantage of internal controls involves the efficiency they create. Technological advances
to improve the accuracy of each transaction also streamline manual processes.
 Accurate Recording
Another advantage of internal controls revolves around the accuracy in recording each
transaction. Internal controls help prevent errors and irregularities from occurring. If errors or
irregularities do occur, internal controls will help ensure they are detected in a timely manner. It
creates confidence that only authorized transactions have taken place
 Safeguarding Assets
It minimizes of the risk of fraud and misappropriation of assets. It involves fraud monitoring and
prevention techniques. For example in case of a banking internal control system, mmonitoring
activities include security cameras and security guards and prevention activities include cash
counting by two employees at a time and cash reconciliation by non-tellers..
 Compliance
Another advantage of using internal controls includes increasing compliance with regulatory
agencies. Internal controls encourage adherence to prescribed policies and procedures. It assures
that adequate documentation supporting transactions is created and retained.
 Protection of Employees
Internal controls protect employees: 1) by clearly outlining tasks and responsibilities, 2) by
providing checks and balances, and, 3) from being accused of misappropriations, errors or
irregularities
 Benefits of Internal Control to the Auditor

I f the audit client benefits from a sound system of internal control, it is likely that the auditor
will also be benefited. All of the above stated benefits help to promote a situation where the
financial statements present a true and fair view. A good system of internal control will make
life easier for the auditor

7. LIMITATIONS OF INTERNAL CONTROLS
No matter how well the internal controls are designed, they can only provide a reasonable
assurance that objectives will be achieved. Some limitations are inherent in all internal control
systems. These limitations include:
Judgment - the effectiveness of controls will be limited by decisions made with human
judgment under pressures to conduct business based on the information available at hand.
Breakdowns - even well designed internal controls can break down. Employees sometimes
misunderstand instructions or simply make mistakes. Errors may also result from new
technology and the complexity of computerized information systems.
Management Override - high level personnel may be able to override prescribed policies or
procedures for personal gains or advantages. This should not be confused with management
intervention, which represents management actions to depart from prescribed policies and
procedures for legitimate purposes.
Collusion - control system can be circumvented by employee collusion. Individuals acting
collectively can alter financial data or other management information in a manner that cannot be
identified by control systems.
8. INTERNAL CHECK
Internal check is best regarded as indicating checks on the day-to-day transactions which operate
continuously as a part of the routine systems whereby work of one person is proved
independently or is complementary to the work of another, the object being the prevention of or
early detection of errors and frauds”.
The main objective of internal check is prevention of errors and frauds and/or detection of errors
and frauds at the earliest. Internal check is a continuous process and is part of the day-to-day
routine. It relates to all the transactions that take place every day. Internal check is achieved by
complementary allocation of duties and by independent verification of the work of one person
by another.
Internal check is a part of internal control system. It ensures that all financial transactions are
properly recorded. It also ensures efficiency of the accounting system followed by the
organization and enables easy preparation of financial statements. It achieves its main object of
minimizing errors and frauds. A sound system of internal check increases the reliability of
financial statements. Internal check discourages fraud and collusion among employees by
instilling a fear of detection in their minds. Internal check assigns responsibilities to persons and
enables maintenance of records and documents properly and thereby ensures smooth flow of
work.

9. DIFFERENCE BETWEEN INTERNAL CONTROL SYSTEM AND INTERNAL CHECK
SYSTEM
Internal control is the system of control established by the management in order to carry on
business in an orderly and efficient manner, ensure adherence to management policies, safeguard
assets and completeness of records whereas Internal check is a system of allocation of
responsibility, division of work and methods of recording transactions, whereby the work of one
employee is checked continuously by another.
Internal check system is one part of internal control system. Internal control is broader concept
as compare to internal check system; it contains many more types of controls other than the
internal check system.
In internal control system, controls other than the internal check system are internal audit system
and other nonfinancial control systems like quality control, purchasing controls, marketing
controls etc.
The essence of internal check system is that the check should be automatic, continuous and
objective while the essence of internal control system is in implementation of Internal check and
Internal audit.
10. DIFFERENCE BETWEEN INTERNAL CHECK AND INTERNAL AUDIT
Way of checking: In internal check system work is automatically checked whereas in internal
audit system work is checked specially.
Cost involvement: in internal check system checking is done when the work is being done.
Mistake can be checked at an early stage in internal check system.
Thrust of system: Thrust of internal check system is to prevent the errors and whereas the thrust
of internal audit system is to detect the errors and frauds.
Time of checking: In internal check system checking is done when the work is being done
whereas in internal audit system work is checked after it is done. Mistakes can be checked at an
early stage in internal check system.
10. DIFFERENCE BETWEEN INTERNAL CONTROL AND INTERNAL AUDIT
Internal control system is a broad concept and in includes internal audit system as we.. Internal
audit system is comparatively a narrow concept.
Internal control system is necessary for every organisation while internal audit system is to be
implemented as per the suitability of the organisation.
The primary objective of internal control system is to prevent the occurrence of fraud while the
internal audit is primarily a backward looking activity.

11. TECHNIQUES OF INTERNAL CONTROL SYSTEM
There are two types of techniques used in internal control system Preventive internal control
techniques and Detective internal control techniques controls. Both types of internal control
techniques are essential to an effective internal control system. From a quality standpoint,
preventive controls techniques are essential because they are proactive and emphasize quality.
However, detective controls techniques play a critical role by providing evidence that the
preventive controls techniques are functioning as intended
Preventive Controls techniques are designed to discourage errors or irregularities from

occurring. They are proactive in nature that helps to ensure departmental objectives are being
met. Examples of preventive controls techniques are:
1. Segregation of Duties: Duties are segregated among different people to reduce the risk
of error or inappropriate action. Normally, responsibilities for authorizing transactions
(approval), recording transactions (accounting) and handling the related asset (custody)
are divided.
2. Approvals, Authorizations, and Verifications: Management authorizes employees to
perform certain activities and to execute certain transactions within limited parameters.
In addition, management specifies those activities or transactions that need supervisory
approval before they are performed or executed by employees. A supervisor’s approval
(manual or electronic) implies that he or she has verified and validated that the activity or
transaction conforms to established policies and procedures.
3. Security of Assets (Preventive and Detective): Access to equipment, inventories,
securities, cash and other assets is restricted; assets are periodically counted and
compared to amounts shown on control records.
Detective Controls techniques are designed to find errors or irregularities after they have
occurred. Examples of detective controls techniques are:
1. Reviews of Performance: Management compares information about current
performance to budgets, forecasts, prior periods, or other benchmarks to measure the
extent to which goals and objectives are being achieved and to identify unexpected
results or unusual conditions that require follow-up.
2. Reconciliations: An employee relates different sets of data to one another, identifies
and investigates differences, and takes corrective action, when necessary.
3. Physical Inventories
4. Internal Audits

12. REVIEW OF INTERNAL CONTROL
To facilitate the accumulative of the information necessary for the proper review and evaluation
of internal controls, the auditor can use one of the following to help him to know and assimilate
the system and evaluate the same:
(1) Narrative record;
(2) Check list;
(3) Questionnaire; and
(4) Flow chart;
 The narrative record is a complete and exhaustive description of the system as found in
operation by the auditor. Actual testing and observation are necessary before such a system is in
operation and would be more suited to small business. The basic disadvantages of narrative
records are:
1. To comprehend the system is operation is quite difficult.
2. To identify weaknesses or gaps in the system
3. To incorporate charges arising on account of reshuffling of manpower, etc.
 A check list is a series of instruction and/or answer. When he completes instruction, he

initials the space against the instruction. Answers to the check list instruction are usually Yes,
No or Not applicable. This is again an on the job requirement and instructions are framed having
regard to the desirable element of control. A few examples of check list instruction are given
hereunder:
1. Are tenders called before placing orders?
2. Are the purchases made on the basis of a written order?
3. Is the purchase order form standardized?
4. Are purchase order forms are pre-numbered?
 Internal control questionnaire is a comprehensive series of questions concerning

internal control. This is the most widely used from for collecting information about the
existence, operation and efficiency of internal control in an organization. An important
advantage of the questionnaire approach is that oversight or omission of significant internal
control review procedures is less likely to occur with this method. With a proper questionnaire,
all internal control evaluation can be completed at one time or in sections. The review can more
easily be made on an interim basis. The questionnaire form also provides an orderly means of
disclosing control defects. It is the general practice to review the internal control system
annually and record the review the detail. In the questionnaire, generally questions are so framed
that a ‘Yes’ answer denotes satisfactory position and a ‘No’ answer suggests weakness.
Provision is made for an explanation or further details of ‘No’ answers. In respect of questions
not relevant to the business, ’Not applicable’ reply is given.

 A flow chart is a graphical presentation of each part of the company’s system of internal
control. A flow chart is considered to be the most concise way of recording the auditor’s review
of the system. It minimizes the amount of narrative explanation and thereby achieves and
consideration or presentation not possible in any other form. It gives bird’s eye view of the
system and the flow of transactions and integration and in documentation, can be easily spotted
and improvements can be suggested. This will help him to understand and evaluate the internal
controls in the correct perspective.
13. AUDIT TESTING
An audit test is a procedure performed by either an external or internal auditor in order to assess
the accuracy of various financial statement assertions. The two common categorizations of audit
tests are substantive tests and tests of internal controls. Both types of tests are used in external
and internal audits in order to reach established audit objectives, as can be outlined in audit
checklists or determined based on the results of audit questionnaires. Audit tests typically are
performed on a sample basis over an existing group of similar transactions. Sampling
approaches can either be statistical or non-statistical, with the ultimate goal being to obtain the
most representative sample of the population before testing begins.
A substantive audit test is a direct test that validates a financial statement balance, while internal
control tests are focused on key controls, such as management reviews or standardized templates
that are designed to prevent and detect material misstatements. Substantive testing often requires
a large deal of recalculating, confirming, and vouching. For example, when an auditor
substantively tests an inventory balance, the auditor will go to the on-site location of the
inventory, run reports that list the amount of inventory stored on the premises, and physically
count each inventory item on a sample basis. Using the same example under an internal control
testing approach, an auditor would assess the systems generating the reports, consider the
experience level of the personnel on the premises that manage the inventory, and review
shipping and receiving documents for the appropriate sign-offs instead of counting the actual
inventory on the premises.
14. SAMPLING IN AUDIT TESTING

Sampling is a process of selecting a subset of a population of items for the purpose of making
inferences to the whole population. Accounting populations usually consist of a large number of
items (debtors, creditors), often totalling millions of rupees, and a detailed examination of all
accounts is not possible. Audit sampling is defined as
“The application of audit procedures to less than 100% of the items within an account balance
or class of transactions to enable the auditor to obtain and evaluate evidence about some
characteristic of the items selected in order to form or assist in forming a conclusion
concerning the population which makes up the account balance or class of transactions”

A fundamental element of any audit programme will be the selection of transactions to be tested
as a sample of all available transactions. Sampling is used in both compliance and substantive
testing and is described in numerous textbooks in auditing
Need for Audit Sampling
Formalized audit sampling procedures offer innumerable benefits to all auditors. These include:
1. Developing a consistent approach to audit areas;
2. Providing a framework within which sufficient audit evidence is obtained;
3. Forcing clarification of audit thinking in determining how the audit objectives will be
met;
4. Minimising the risk of over-auditing; and
5. Facilitating more expeditious review of working papers
15. STATISTICAL SAMPLING IN AUDIT

Statistical sampling involves the random selection of a number of items for inspection and is
endorsed by the accountancy bodies. In statistical sampling, each item has a calculable chance of
being selected.
A commonly held misconception about statistical sampling is that it removes the need for the
use of the professional judgement. While it is true that statistical sampling uses statistical
methods to determine the sample size and to select and evaluate audit samples, it is the
responsibility of the auditor to consider and specify in advance factors such as, materiality, the
expected error rate or amount, the risk of over-reliance or the risk of incorrect acceptance, audit
risk, inherent risk, control risk, standard deviation and population size, before the sample size
can be determined.
Statistical sampling allows an auditor’s judgement to be concentrated on those areas of the audit
where it is most needed. It allows the quantification of key factors and the risk of errors. This is
not to suggest that statistical sampling methods remove the need for professional judgement, but
rather that they allow elements of the evaluation process to be quantified, measured and
controlled.
The advantages of statistical sampling are numerous:

1. The sample result is objective and defensible. Nearly all phases of the statistical process
are based on demonstrable statistical principles.
2. The method provides a means of advance estimation of sample size on an objective
basis. The sample size is no longer determined by traditional methods of guesswork; it is
determined by a statistical method.
3. The method provides an estimate of error. When probability sampling is used, the results
may be validated in terms of how far the sample projection might deviate from the value
that could be obtained by a 100% check.

4. Statistical samples may be combined and evaluated, even though accomplished by
different auditors. That the entire test operation has an objective and scientific basis
makes it possible for different auditors to participate independently in the same test and
for the results to be combined as though accomplished by one auditor.
5. Objective evaluation of test results is possible. Thus, all auditors performing this audit
would be able to reach the same conclusion about the numerical extent of error in the
population. While the impact of these errors might be interpreted differently, there can be
no question as to the facts obtained, since the method of determining their frequency in
the population is objective.
16. APPROACHES TO STATISTICAL SAMPLING

In statistical sampling, samples during an audit are normally selected through one of the
probability sampling methods — random, systematic or stratified. Probability sampling provides
an objective method of determining sample size and selecting the items to be examined. Unlike
non-statistical sampling, it also provides a means of quantitatively assessing precision (how
closely the sample represents the population) and reliability (confidence level, the percentage of
times the sample will reflect the population).
Simple Random Sampling

In auditing, this method uses sampling without replacement; that is, once an item has been
selected for testing it is removed from the population and is not subject to re-selection. An
auditor can implement simple random sampling in one of two ways: computer programs or
random number tables.
Systematic (Interval) Sampling

This method provides for the selection of sample items in such a way that there is a uniform
interval between each sample item. Under this method of sampling, every “Nth” item is selected
with a random start.
Stratified (Cluster) Sampling

This method provides for the selection of sample items by breaking the population down into
stratas, or clusters. Each strata is then treated separately. For this plan to be effective, dispersion
within clusters should be greater than dispersion among clusters. An example of cluster
sampling is the inclusion in the sample of all remittances or cash disbursements for a particular
month. If blocks of homogeneous samples are selected, the sample will be biased.
Remember, an essential feature of probability sampling methods is that each element of the
population being sampled has an equal chance of being included in the sample and, moreover,
that the chance of probability is known. Only in this way, is a probability sample representative
of a population

17. INTER-FIRM COMPARISON
It is technique of evaluating the performance, efficiency, costs and profits of firms in an
industry. It consists of voluntary exchange of information/data concerning costs, prices, profits,
productivity and overall efficiency among firms engaged in similar type of operations for the
purpose of bringing improvement in efficiency and indicating the weaknesses. Such a
comparison will be possible where uniform costing is in operation.
An inter-firm comparison indicates the efficiency of production and selling, adequacy of profits,
weak spots in the organisation, etc. and thus demands from the firm’s management an immediate
suitable action. Inter-firm comparison may enable the management to challenge the standards
which it has set for itself and to improve upon them in the light of the current information
gathered from more efficient units.
Advantages of Inter-firm comparison:
The main advantages of inter-firm comparison are:-
1. Such a comparison gives an overall view of the industry as a whole to its members- the
present position of the industry, progress made during the past and the future of the
industry.
2. It helps a concern in knowing its strengths or weaknesses in relation to others so that
remedial measures may be taken.
3. It ensures an unbiased specialized reporting on particular problems of the concern.
4. It develops cost consciousness among members of the industry.
5. It helps Government in effecting price regulation.
6. It helps to improve the quality of products manufactured and to reduce the cost of
production. It is thus advantageous to the industry as well as to the society.
Limitations of inter-firm comparison:

The following are the limitations in the implementation of a scheme of inter-firm comparison :
1. Top management feels that secrecy will be lost.
2. Middle management is usually not convinced with the utility of such a comparison.
3. In the absence of a suitable Cost Accounting System, the figures supplied may not be
reliable for the purpose of comparison.
18. INTRA-FIRM COMPARISON
Intra-firm comparison means comparison among different units/products/strategic business unit
(SBU) of a firm. This comparison is possible only when uniform costing methods and practices
are being adopted by all units and SBUs.
Intra firm comparison helps the management in identifying the units/Strategic SBUs which have
not been performing as per the internal benchmark or standards achieved by other units SBUs.
This comparison is difficult sometime when the firm is dealing in different product/sectors and
their working conditions are significantly different.

Advantages of Intra-firm comparison: The main advantages of intra-firm comparison are:-
1. Such a comparison gives an overall view of the firm as a whole to the owner or
stakeholders and gives a comparative view of different product/different business of the
firm.
2. It helps a SBU in knowing its strengths or weaknesses in relation to others SBUs.
3. It develops cost consciousness among units of the firm.
19. RATIO /TREND ANALYSIS AS A TOOL OF INTER-FIRM AND INTRA- FIRM

COMPARISON
Ratio analysis is a process of determining and interpreting relationships between the items of
financial statements to provide a meaningful understanding of the performance and financial
position of an enterprise. Ratio analysis is an accounting tool to present accounting variables in a
simple, concise, intelligible and understandable form.
A firm would like to compare its performance with that of other firms and of industry in general.
The comparison is called inter-firm comparison. If the performance of different units belonging
to the same firm is to be compared, it is called intra-firm comparison. Such comparison is almost
impossible without accounting ratios. Even the progress of a firm from year to year cannot be
measured without the help of financial ratios. The accounting language simplified through ratios
is the best tool to compare the firms and divisions of the firm.
20. AUDIT IN DEPTH
Audit in depth as the name implies means checking a transaction extensively from origin to end.
It is an audit technique which is used to evaluate the effectiveness of internal control system in
an organisation. It is used in investigation exercises whereby the objective is to thorough
examination of transactions or records. In this technique all aspects relating to the transaction are
checked such as sanctity of transaction, validity of transaction, adherences of prescribed
procedures, arithmetical accuracy of transaction, accounting treatment of transaction etc. It is
also called vertical vouching as against horizontal vouching.
For example, a purchase of goods may commence when a predetermined re-order level has been
reached. The ensuing stages may be summarized as given below:-
1. Authorization of Purchase requisition: Check whether the requisitions are pre-printed,
pre-numbered and authorized. See whether the purchase requisition have been authorized
by competent official.
2. Issue of Request for quotation: Check whether request for quotatioOn have been
issued or not. If not find the reasons of not issuing request for quotation. Check whether
the requests for quotation have been issued to approved vendors.

3. Issue of Purchase order: Check whether purchase order have been issued or not. If
purchase order have been issued check whether it has been issued from the competent
authority. Check whether the purchase order have been issued to the approved vendor
who has given lowest quote. If not check the reasons. Check whether the reasons of
issuing the purchase order to a vendor other than the lowest bidder have been approved
by the competent authority.
4. Receipt of goods and entry of goods in store ledger: check whether the goods receipt
is as per specification given in the purchase order. If not check whether the deviations
have been recorded and the communication has been made to the supplier or not. Check
whether the goods receipt have been properly recorded in store ledger or not.
5. Approval of payment of Supplier Invoice: Check whether the amount has been
approved by the competent authority.
6. Payment of supplier invoice: Check whether the supplier bill have ben paid correctly.
Check whether all deduction for short receipt of goods, late delivery of goods, inferior
quality of goods, advance payment for the goods have been done or not.
7. Accounting of Transaction: Check whether accounting made is correct or not. Check
whether correct expenses code have been debited or not. Check whether the applicable
accounting standard have been complied with or not.
It should be noted that the above list is not necessarily comprehensive, nor does its constituent
stages inevitably take place in the sequence suggested.

CHAPTER 5
REVIEW OF INTERNAL CONTROLS
Here in this section we will cover review of purchase operation, management information system,
selling and distribution policies and programs, manufacturing operations, HR system and
management decisions.
1. REVIEW OF PURCHASING OPERATIONS

Purchase is one of the most important functions in a manufacturing organisation. In most of the
manufacturing and trading organisation, purchases constitutes about 50-70% of the cost. So it
becomes very important to have an efficient internal control over the purchasing activities of an
organisation.
2. OBJECTIVES OF REVIEW OF INTERNAL CONTROL OVER PURCHASING

OPERATIONS
The objectives of review of internal control system includes to ascertain

1. Whether controls are in place in the process to ensure that accountability is established as
early as possible at all points along with the accountability chain.
2. Whether segregation of duties, risk mitigating controls, exists within transaction processing
authorization. Whether separation of duties exists between various types of transaction
processing (e.g., procurement, accounts payable, disbursements).
3. Whether the quantity and quality of goods and services received is documented and agrees
with the requisition and performance expectations such as service level agreements, contract
terms, and vendor performance.
4. Whether transactions are properly verified before disbursement, transactions and activities
are properly authorized, transactions and events are properly recorded.
5. Whether accountability for refunds and credits are maintained. Whether staff understands
their duties, responsibilities, and accountabilities.
6. Whether procurement practices and procedures are documented, and in compliance with
central and state laws and other requirements such as contract terms and conditions.
Procurement records for authorizations and transactions are maintained in accordance with
established requirements.
7. Whether accounting records are protected from theft, obsolescence, or destruction. Whether
assets are safeguarded from loss through watchful and responsible care and reconciliation
functions

(CA, CS, BSL LLB, Diploma in Corp. Diploma) Page 5.1
3. DIFFERENT PROCEDURAL ASPECTS RELATING TO REVIEW OF PURCHASE
OPERATIONS
Segregation of duties in purchase operations

To ensure proper separation of duties, assign related buying functions to different people. Ensure
proper segregation, no single person has complete control over all buying activities.
It is always preferable to have different people who -
I. Approve purchases
II. Receive ordered materials
III. Approve invoices for payment
IV. Review and reconcile financial records
V. Perform inventory counts
If segregation of duties does not exist in purchases operations, this may result into unauthorized or
unnecessary purchases, improper charges to department budgets, purchase of goods at excessive
costs, use of goods for personal purposes
Accountability, authorization, and approval mechanism

In an efficient purchase system, the mechanism of authorization, review, and approval should exist.
All purchases should be made on the basis of signed agreements, contract terms, and purchase
orders.
It will always be advisable to -
(i) Comply with ethical buying practices and policy.
(ii) Review and update signature authorizations periodically.
(iii) Obtain pre-approval of consultant agreements by Purchasing.
(iv) Verify receipt of goods and services against contract/ purchase order and invoice
Information.
(v) Reconcile ledgers for accuracy of recorded transactions.
(vi) Monitor to ensure that invoices are paid in a timely manner.
In case the mechanism of ascertaining accountability does not exist. it may result into unauthorized
or unnecessary purchases, purchases at higher rate, misappropriation of funds.
Physical control over of assets

Once the purchases are done, it is necessary to secure the materials in a safe location. To ensure that
the resources are accounted for, it is necessary to periodically verify the inventory and compare the
results with the books.
To ensure security of assets, it is advisable to -
(i) Secure goods received in a restricted area.
(ii) Restrict inventory access to appropriate staff.
(iii) Lock goods and materials, and provide key or combination to as few people as possible.

(iv)Keep inventory records and periodically calculate beginning and ending inventory amounts.
If physical control over assets does not exists, it may result into theft of goods, inventory shortages,
additional costs incurred for replacement of goods
Review and reconciliation

Review and reconciliation is a very important part of purchase internal control system. Timely
review of supplier’s invoice, packing slips, and purchase orders is very necessary to ensure accuracy
of the information for prior payment, correct quantity ordered, and price charged. Monthly ledger
reconciliation enables to find improper charges and validate appropriate financial transactions.
It is advisable to -
i. Review supplier invoices for accuracy by comparing charges to purchase orders.
ii. Verify that the goods and services purchased have been received.
iii. Perform monthly reconciliations of operating ledgers to ensure accuracy and timeliness of
expenses.
In case review and reconciliation process is missing, it may result into improper charges to the
department budgets, Disallowances resulting from costs charged to incorrect accounts/funds,
payments made for items or services not provided
3. REVIEW OF MANAGEMENT INFORMATION SYSTEM

A management information system (MIS) provides information that organizations need to manage
themselves efficiently and effectively. MIS is an information system which provides information to
the management so that management may take timely decisions. MIS is basically concerned with
processing data into information which is then communicated to the various Departments in an
organisation for appropriate decision-making. MIS provides several benefits to the business
organisation: the means of effective and efficient coordination between Departments; quick and
reliable referencing; access to relevant data and documents; improvement in organizational and
departmental techniques. Management information system helps companies keep track of its
resources and stay organised. MIS allows managers to make different types of reports about the
company activities.
The clear starting point in reviewing the Management Information System (MIS) is to understand
what it collects, how it works, and how teams can call (or contribute) information using it. There are
some basic questions to consider:
- What are the components of the information system?

- Who uses each component?
- What information is available?
- What information is not available?
- How reliable is the information?

- How readily, and how quickly, is it available?
- How hard is it to modify data?
Management Information Systems Review Objectives

1. To determine whether review procedures are necessary to achieve stated objectives.
2. To determine whether MIS policies or practices, processes, objectives, and internal controls
are adequate.
3. To evaluate whether MIS applications provide users with timely, accurate, consistent,
complete, and relevant information.
4. To assess the types and level of risk associated with MIS and the quality of controls over
those risks.
5. To determine whether MIS applications and enhancements to existing systems adequately
support corporate goals.
6. To determine whether MIS is being developed in compliance with an approved corporate
MIS policy or practice statement.
7. To determine whether management is committed to providing the resources needed to
develop the required MIS.
8. To determine if officers are operating according to established guidelines.
9. To evaluate the scope and adequacy of audit activities.
10. To initiate corrective action when policies or practices, processes, objectives, or internal
controls are deficient.
11. To determine if any additional work is needed to fulfill the examination strategy of the
Institution.
4. MANAGEMENT INFORMATION SYSTEMS REVIEW PROCEDURES

Review of management information system requires a systematic approach. Following steps are
require to be taken for review of MIS system of an organisation
1. Obtain following documents
a. MIS-related audit/compliance reviews?
b. Institution’s formal MIS policies and practices framework/guidelines
c. Board/MIS Committee-related minutes
d. Organization charts detailing MIS responsibility.
2. Study previous MIS review’s findings and management’s response to those findings. Study
the deficiencies or strengths pointed out in the reports. On the basis of deficiencies reported,
set priorities for review. Study the recommendations provided for resolving MIS deficiencies
and management’s responses. Check whether corrective actions have been initiated and/or
completed and see follow-up audit activities.

3. Determine any material changes in regard to the five MIS elements i.e. Timeliness,
Accuracy, Consistency, Completeness, and Relevance. Review MIS-related policies,
practices and processes. See if any changes have been made since the previous review.
4. Review the Internal Control Questionnaire (ICQ) and determine the scope and objectives of
the MIS review.
5. Identify each of the functional or product related areas to be reviewed. Provide copies of the
MIS review objectives, review procedures and highlight the areas of MIS review that need to
be addressed during the review. Aggregate these observations, conclusions, and
recommendations for each of the functional areas addressed and incorporate them (as
appropriate) into the final MIS review conclusions.
6. For the selected sample of MIS system(s) and as appropriate to support the defined scope,
obtain user manual, user training manual/instructions, project plan and related work papers,
Sample of MIS output Reports, MIS project development/enhancement work papers.
7. Test for compliance with established policies or practices and processes, and the existence of
appropriate internal control measures. Refer to the Internal Control Questionnaire as needed.
8. Identify any area with inadequate supervision and/or undue risk. As required, perform
appropriate verification procedures.
9. Select and review samples of ongoing executive reports for the targeted MIS area(s).
Determine whether
a. The source of the information collected originates from the expected business area.
b. Users of the information are the appropriate employees or managers within that area of
activity.
c. The reports are ultimately distributed to the appropriate users.
d. The flow of these MIS information/reports is consistent with the responsibilities
reflected on the area’s official organization chart.
10. Determine the degree to which management and the staff in an area under review use MIS
adequately and can support that the MIS being used is appropriate and effective. Discuss the
five MIS elements with a senior manager(s) of the respective business unit. Repeat this work
step with an employee of the business unit who has experience with the MIS system. Based
on management’s self-assessment of the usability of its MIS, identify any planned activities
to enhance, modify, or expand these systems.
11. Review minutes of the board of directors or committee(s) representing the MIS target area(s)
for a relevant time period. Determine any areas where MIS does not seem to meet the five
required elements of MIS. Identify MIS issues for follow up.
12. Request a copy of the development plan for significant MIS-related projects. Review MIS
project objectives and determine if they address reported MIS weaknesses and meet business
unit plans. Review the project management technique used by management and determine
the status of important MIS projects. Sample a significant MIS project(s) and determine
whether it follows an approved and implemented development methodology.

13. Select a system and request copies of relevant user instructions. Determine whether the
guidelines are meaningful, easy to understand, and current.
14. Determine whether user manuals provide adequate guidelines about complete description of
the system, Input instructions, including collection points and times to send updated
information, Balancing/ reconciliation instructions, full listing of output reports, including
sample formats.
15. To review how information is identified, gathered, merged, manipulated, and presented,
obtain a work flow showing data from the point-of-entry, through user processes, to final
product. Discuss the area’s MIS process with a representative sample of users and determine
if they know where the data is coming from, where it is going, and how it gets there. Identify
and note the points where adjustments to data occur. Identify the department staffs who are
responsible for the MIS related input data and reports. Check whether data adjustments are
adequately documented.
16. Review the effectiveness of MIS in communication linking executives, appropriate users, and
information systems employees. Review the effectiveness of the flow of communication
throughout the organization and the documentation of which underlying MIS process
supports the area’s management.
17. Determine the adequacy of MIS training including whether training needs are properly
identified and prioritized. Check whether training is organized in a formal classroom setting,
or on-the-job, or is a combination of both approaches. Check whether training material is
provided or not. Check whether any training manual exist or not. Check whether training
material adequately covers relevant and current issues.
18. Determine whether established procedures are sufficient to ensure the proper testing of
system developments or enhancements. Determine if authorized processes are followed as
data is acquired, merged, manipulated, and up-loaded from subsystems.
19. Check if the organization has had recent merger and/or acquisition activity, determine how
management at the senior and departmental levels ensure that the resulting MIS supports and
includes the five MIS elements. If mergers and acquisitions are frequent, determine whether
appropriate policies or practices and procedures have been developed to support such activity
from an integrated MIS perspective and the consolidation of MIS systems in a merger still
meets the requirements of a quality MIS system.
20. Review the results of your work, summarize your findings and initial conclusions, and
discuss issues with an appropriate officer(s):
a. How well risks are controlled.
b. Identify significant control deficiencies.
c. Recommend action to remove deficiencies.
d. Obtain management’s corrective commitments and firm time frames.
21. Prepare a memorandum of your conclusions and supporting findings. Identify suggested
follow-up actions, prepare a memorandum and document work programs to facilitate future
examinations.

5. REVIEW OF SELLING AND DISTRIBUTION POLICIES AND PROGRAMS
Selling and distribution function are one of the most important function for an organisation. The
survival of an organisation largely depends on the effectiveness of selling and distribution function.
Management of distribution channels involves efficient channel design, conflict management and
implementation of sophisticated channel information systems which will enhance the process of
making the products available to the end consumer in a timely manner.
Review of sales and distribution function is very important from internal control point of view and it
requires a detailed understanding of company business.
Objectives of review of sales and distribution policies and programs

1. To determine whether sales and distribution policies and programs are adequately
documented
2. To determine whether sales and distribution policies and programs are approved by the
appropriate authority.
3. To determine that sales and distribution policies are matching with the overall corporate
objective.
4. To determine whether maker checker and approver concept exist in the framing, approval
and implementation of policies.
5. To check whether the distribution program is able enough to serve customers of all regions.
6. Whether controls are in place in the process to ensure accountability is established as early
as possible at all points along the accountability chain.
7. Whether segregation of duties, or mitigating controls, exists within transaction processing
authorization, custody, and recording functions. Separation of duties exists between the
various types of transaction processing (e.g., Discount approval, selection of mode of
transportation. Accounts receivable etc).
Review Procedure
A: SALES (Final product, Rejected Products, Scrap, Stores sales)
1. Check whether all the Sales of sold stock according to schedules. If not, prepare the list of
the delay dispatches along with reason of the delay in dispatches.
2. Quantify the losses, for the material which are not dispatched with in time i.e. the company
has paid the Airfreight/sea freight.
3. Check whether all the bills are made according to the purchase contracts with the customer.
If not list out the discrepancy. Check the billing system and see whether the billing has been
done through the authorized channel. Check for any informal billing system. If such system
exists, analyze with management and report. List out the cases of delays in dispatches for
sold & unsold stock after production.

4. Check whether there is variance in actual and target sales prices. If so ascertain the reasons
after discussions with marketing executives. Check whether the discount given is approved
by the appropriate authority.
B: Review of system of awarding the transport contracts

1. Check the system of sending enquiry and receiving quotations.
2. Check the control over sending enquiry and receiving, how followed up, record keeping, etc.
3. Check whether basis of taking decision is documented properly or not.

4. Check whether date of approval, name of approving authority is mentioned on the approval
document or not.
5. Check whether the contract is entered into with thee selected transporter. Check the terms
and conditions of transporter agreement and report lapses if any.
C: Review of process of taking insurance during transit

1. Check whether the process of taking insurance for transit vehicle exists or not.
2. Check the coverage of insurance policy i.e. it covers full inventory value or just material
price.
3. Check who takes the insurance transporter or the client
4. Check whether proper insurance value is declared for insurance coverage.
5. Check whether the insurance policy is made available to all concerned.
6. Check whether any cost benefit analysis has been done for the insurance premium paid and
claim launched.
D: Review of Sales Return
1. Is the mechanism of schedule of schedule of authority exist for the sales return i.e. system
relating to sale returns prescribe limits on the authority of managers at various levels to
accept return of goods?
2. Are sale return analyzed with reference to the reason & necessary actions taken viz- a- viz
reasons identified
3. Are the returned goods inspected before acceptance? Are returned goods duly accounted in
inventory records?
4. Is an inward return note prepared promptly against each sale return, indicating the quantity
and specifications of the goods received back?
5. Whether credit note are issued on the basis of inward returned note. Whether a proper
control over the issue of credit notes especially with regard to the authority for issuing the
same. Are appropriate entries made in the books of account promptly? Check whether the
excise paid is reversed for the returned goods or not
6. Is the sale commission paid in respect of goods returned recovered through an appropriate
debit note?

E: Review of Claims by customer
1. Are all claims (for poor quality or for delay in delivery and similar other reason) approved by
an authorized manager? Is the approval granted only after a proper examination of the
matter?
2. Is a credit note sent to the customer in respect of each approved claim? Are appropriate
entries made in the books of account promptly?
F: Review of Debit/Credit notes
1. Check whether the corresponding impact of credit note/debit note on Sales Tax, Excise etc.
have been considered or not
2. Check whether credit note/debit note are issued in accordance with the Sales Policy and term
of the Sales Order.
3. Check whether credit note/debit note properly authorized.
G: Review of Sales Commission

1. Check all the sales commission are given as per contracts made with the party
2. Make the reconciliation of sales with sales commission.
H: Review of Export Sales

1. Reasons wise analysis of the overdue bills.
2. Loss of overdue interest due to delay in realization of the export bills.

3. Norms of Export trade, imports, process of order booking to production planning, realization,
settlement benefits, claims, etc.
I: Review of Marketing - International & Domestic:
1. Are standard price lists maintained? Is a special sanction from a senior manager required in
the case of sales at prices lower than the standard price?
2. Does the system of allowing rebates and discount provide for adequate controls? In particular
is there a clear cut policy for allowing such rebates and discounts? Are the authorities for
various managers in this regard clearly laid down and are they reasonable?
3. Are special sanctions required in case of sales to those companies/ other enterprises in which
the managerial personnel or senior employees are interested?
4. Is there a well defined policy for making sales to employees at concessional prices? Does it
laid down any limits in this regard?
5. Is there a timely preparation of a written sale order on receipt of an order from a customer?
6. Are sale orders pre numbered? Is a lack of continuity in sale order number duly enquired
into?
7. Is there a proper authorization of credit, price, quantity and other important terms of the sale
order?

8. Is there a system of fixing credit limit for regular customer? Are these limits approved by a
senior manager as per the sales policy determined by the top management? Are these limits
reviewed periodically in the light of the experienced in dealing with the customer?
9. Is credit limit of the customer concerned checked before sanctioning the credit on the sale
order? Is up to date information on the extent of the credit already extended to the customer
readily available for this purpose?
10. Is a copy of each sale order sent to the dispatch department and the accounts department?
11. Is a dispatch document, e.g. a good outward challan, prepared at the time the goods are
dispatch to the customer? Is it matched with the bill of lading or railway receipt/transporter
receipt?
12. Are dispatch documents pre numbered and missing document numbered duly enquired into?
13. Is there a system of checking each consignment of good leaving the premises with the related
dispatch document?
14. Is a copy of dispatch document, i.e. goods outward challan/gate pass sent to the customer and
to the accounts department?
15. Is an acknowledgement of receipt of goods obtained from the customer or from his agent on
the copy of the dispatch document?
6. REVIEW OF MANUFACTURING OPERATIONS

In general parlance, Manufacturing means converting an input (Raw material) into output (finished
product) with the use of man, machines, material, power etc.
Manufacturing operations is a prime source of money outflow i.e. a large amount of money is spent
on manufacturing process e.g. in buying machinery, raw material, consumables, paying salary to
workers etc. It is very important to review the manufacturing operations in timely manner so that the
identified in-efficiency may be eliminated controlled on immediate basis.
Objectives of Review of Manufacturing Operations
1. Whether the organization have any manufacturing process management system.
2. Whether the policies and procedures for production planning well defined & well
documented.
3. Whether the organisation have a quality management system in place. If so, whether the
organisation have a written quality policy and whether it is adhered or not.
4. Whether the organization is following six sigma. Whether the organisation have a written
maintenance policy.
5. Whether the organization have a written scrap policy.
6. Whether security policies are documented or not.

Review of Production/Modification Planning
1. Whether a standard documentation is used to communicate sales orders and
production/modification requirements to production personnel.
2. Whether production/modification schedules are compared to sales orders to ensure that
production timing and quantities are appropriate.
3. Whether Production/modification schedules is reviewed and approved by an appropriate
officer.
4. Whether standard documentation is used to communicate material requirement plans
(including quantities and dates) to the purchasing department.
5. Whether Material requirement plans (MRPs) is compared to production/modification
schedules weekly to ensure that quantities and timing (including the effect of lead times) are
appropriate.
6. Whether instances of insufficient or excessive raw material inventory are monitored
weekly/monthly.
7. Whether MRP is based on accurate and up-to-date bill of materials (BOM). Whether
production/ Modification Process Employees are trained in the use of the equipment.
8. Whether employees are trained to perform a number of tasks to provide cover for other
skilled employees.
9. Whether continuous improvement initiatives such as Kaizen, Poke-yoke are pursued.
10. Whether management reviews and follow-up following on daily/weekly basis
- Order book status and order intake trends
- Production volumes and variances by product and location
- Machine utilisation rates
- Production efficiency data (e.g. usage, scrap, rework etc.)
- Scheduled and unscheduled downtime
- Inspection and testing results
- Product quality data (defects, failures, customer complaints, warranty costs etc.)
- Output per employee and per productive hour
11. Whether production performance measures are benchmarked internally and against other
organizations, including:
- Machine utilisation rates
- Materials usage costs as a percentage of total production costs
- Scrap and rework levels
- Scheduled and unscheduled downtime as a percentage of total production time
- Inspection and testing costs as a percentage of total production costs defect and
failure rates
- Warranty and product liability costs as a percentage of total production costs
- Customer complaint and return rates

- Material stock levels divided by average daily usage employee productivity levels
12. The costing of the modification job should be approved by an appropriate officer.
Review of Quality Management system
1. Whether formal documented instructions / procedures are available on:
I. Quality tests to be performed at each stage of the production process
II. Steps to be taken in the case of negative results
III. Documentation required to evidence completion and results of quality checks
2. Whether sufficient quantities of each production run are tested to enable compliance with
quality control standards
3. Whether Quality assurance procedures are integrated into the production process.
4. Whether defect rates, customer returns and complaints due to poor quality are monitored.
5. Whether measuring equipment and devices are calibrated on a periodic basis i.e. quarterly,
half yearly.
Review of Maintenance Management System

1. Whether responsibility for all aspects of equipment maintenance and management are clearly
defined.
2. Whether a planned program for scheduled preventative maintenance is prepared or not.
3. Whether production equipment are maintained in accordance with-
a. Manufacturers specifications
b. Contractual agreements
c. Legal requirements or not
Review of working environment, safety and security

1. Whether separate areas are identified for inventory storage and handling, high value part
storage, shipping and receiving, vaults, toxic materials
2. Whether entry and exit points for sensitive areas have appropriate security controls such as
security personnel, gate passes, restricted access mechanisms, card keys, cameras and
lighting, perimeter fencing
3. Whether smoke detection and fire-fighting equipment are functional and provide adequate
protection.
4. Whether the workers use self protective devices at the work place.
5. Whether equipment and evacuation procedures are tested on a regular basis and documented.
6. Whether security incidents i.e. accidents/theft etc are formally reported and tracked.

7. REVIEW OF PERSONNEL POLICIES
In review of personal polices, several functions of Human resources department are reviewed. This
review is more than just looking at personnel files to make sure they’re complete and consistent with
applicable laws and legislation pertaining to employment practices. In personal policies review it is
ascertained whether human resources function is supporting the company philosophy, mission and
values.
A. Review of Employee Relations
The employee relations area of human resources is typically responsible for addressing employee
concerns, designing and analyzing employee opinion surveys, assisting HR leadership with
monitoring the performance management system, and representing the company in matters involving
claims pertaining to unemployment compensation and unfair employment practices. An review of
these functions includes reviewing the level of employee satisfaction. Employee satisfaction can be
measured by turnover rate; number of employee complaints filed and resolved, the status of action
plans from recent employee opinion surveys, and the effectiveness of performance management
system.
B. Review of Safety and Risk Management
The goal of HR department’s safety and risk management program is to create and maintain a safe
work environment. Auditing safety and risk management function goes beyond merely assessing
adherence to company occupational health safety policy, however it includes assessing employee
participation in maintaining a safe work environment, measuring the effectiveness of safety training
to reduce the number of workplace injuries, and providing training related to workplace violence,
actions of disgruntled employees and civil unrest.
C. Review of Compensation and Benefits
Reviewing compensation and benefits begins with an analysis of compensation practices — review
the employee survey to get sure that organisation’s pay practices are appropriate for each job group,
as competitive as possible for geographic area and the industry, and, importantly, the pay practices
must be fair. Reviewing compensation plans takes time to complete; based on the size of the
workforce. This part of your person policy review may be more effectively outsourced than
conducting the analyses in-house.
D. Recruitment and Selection
Organization’s recruitment and selection process shapes part of company’s reputation. Reviewing
human resources employment function involves a review of the way applicants are received. An
review should reveal how knowledgeable the engaged employment specialists are concerning
organizational structure, positions within each department, and fair employment practices in
recruiting and hiring candidates.

E. HR Departmental Practices
In addition to auditing specific areas of human resources department, review of HR function in its
totality and in relationship to other departments is also required. An ineffective HR programs can
undermine an organization’s ability to achieve its mission by stunting its competitiveness in the
labor market, increasing unjustified financial costs, and putting the organization at risk for lawsuits
or regulatory inquiries due to non-compliance or misconduct.
8. APPRAISAL OF MANAGEMENT DECISIONS
Management decision making

Decision-making is an essential aspect of modern management. It is a primary function of
management. A manager takes hundreds of decisions consciously and subconsciously. A decision
may be defined as “a course of action which is consciously chosen from among a set of alternatives
to achieve a desired result.” It represents a well-balanced judgment and a commitment to action. all
Management decision-making process steps:

1 Define the problem.
.2
Identify limiting factors.
.3 Develop potential alternatives.
.4 Analyze the alternatives.
.5 Select the best alternative.
.6 Implement the decision.
.7 Establish a control and evaluation
. system.
a
Objectives of appraisal of management decisions

The main objective of appraisal of management decision is to see how decisions are taken, whether
decisions taken are meeting the organisation objectives. Whether documentation is made to
substantiate the decision making process.
Management decision making appraisal process

1. In appraisal of management decision, one of the most important things is to see whether the
objectives are well defined. Objectives and outputs should be set out clearly and relate
explicitly to policy or strategy. They should be defined so that it can be established by
evaluation after the event whether and to what extent objectives have been met. It is
important that objectives are not described in such a way as to exclude options. Ideally
objectives should be SMART i.e. specific, measurable, agreed, realistic and time-dependent
2. Check while taking the decision how many options have been considered. These must
include a “do nothing” or “do minimum” option which provide a benchmark against which
other options can be judged. Factors below could influence the choice of alternatives:
- Risk;
- Timing;
- Scale and location;
- Scope for shared service arrangements with other public bodies;
- Degree of private sector involvement;
- Capacity of the market to deliver the required output;
- Alternative asset uses;
- Use of new or established technology; and
- Environmental equality.
3. For Major Investment Projects as wide a range of options as possible should be considered
before preparing a short list for full appraisal. Time pressures frequently cause a manager to
move forward after considering only the first or most obvious answers. However, successful
problem solving requires thorough examination of the challenge, and a quick answer may not
result in a permanent solution. Thus, a manager should think through and investigate several
alternative solutions to a single problem before making a quick decision. Techniques like
brainstorming, Delphi technique, nominal group technique may be used to develop
alternative solution. Where some options are dismissed before a full appraisal the reasons
should be explained.
4. Whether potential options are analyzed reviewed in terms of value costs, benefits, risk
and uncertainties of options
While evaluating various options, it is necessary to decide the relative merits of each idea.
Managers must identify the advantages and disadvantages of each alternative solution Before
making a final decision.
Evaluating the alternatives can be done in numerous ways.
- Determine the pros and cons of each alternative.
- Perform a cost-benefit analysis for each alternative.
- Weight each factor important in the decision, ranking each alternative relative to its
ability to meet each factor, and then multiply by a probability factor to provide a final
value for each alternative.
Regardless of the method used, a manager needs to evaluate each alternative in terms of its
- Feasibility — can it be done?
- Effectiveness — How well does it resolve the problem situation?
- Consequences — what will be its costs (financial and nonfinancial) to the
organization?
5. Whether the options are selected after due analysis and a consensus decision is taken
After a manager has analyzed all the alternatives, it is necessary that the best one should be
selected. While reviewing the management decision making, it is necessary to see which

option have been selected. If an option other than the best option have been selected, it is
necessary that justification need to be given. While reviewing whether the selected decision
is best of not, justification given may be evaluated. The basic elements of internal control
should prevail in decision making process
6. Whether the selected alternative implemented efficiently
Managers are paid to make decisions, but they are also paid to get results from these
decisions. Positive results must follow decisions. Everyone involved with the decision must
know his or her role in ensuring a successful outcome. To make certain that employees
understand their roles, managers must thoughtfully devise programs, procedures, rules, or
policies to help them in the problem-solving process. While reviewing the implementation
phase, it should be seen whether the proper policies and program have been designed to
implement the selected proposition. Whether the selected alternative has been implemented
as decided.
7. Review of management decision control and evaluation system
Ongoing actions need to be monitored. An evaluation system should provide feedback on
how well the decision is being implemented, what the results are, and what adjustments are
necessary to get the results that were intended when the solution was chosen.
In order for a manager to evaluate his decision, he needs to gather information to determine
its effectiveness. Was the original problem resolved? If not, is he closer to the desired
situation than he was at the beginning of the decision-making process?
If a manager’s plan hasn’t resolved the problem, he needs to figure out what went wrong. A
manager may accomplish this by asking the following questions:
- Was the wrong alternative selected? If so, one of the other alternatives generated in the
decision making process may be a wiser choice.
- Was the correct alternative selected, but implemented improperly? If so, a manager should
focus attention solely on the implementation step to ensure that the chosen alternative is
implemented successfully.

CHAPTER 6
AUDIT ENGAGEMENT AND DOCUMENTATION
Although every audit is unique, the audit process is similar for most engagements, and normally
consists of three stages: planning, executing and reporting.
1. Audit Plan
In order to ensure a high standard of performance, it is important that the auditor should prepare
adequately for his work. Planning for an audit, just like every human endeavour, is essential for the
smooth performance of the audit work and its successful completion.
Planning ahead for an audit work will not only guarantee a valid audit opinion but will also help the
auditor to ensure that:
(a) The audit objective is established and achieved;
(b) The audit is properly controlled and adequately directed at all stages;
(c) High risk and critical areas of the engagement are not omitted but that adequate attention is
focused on these areas; and
(d) The work is completed economically and expeditiously, hence, saving on audit resources.
It is important to distinguish between an audit plan and audit planning memorandum. Audit plan
relates to preparations made by the auditor for one specific audit engagement while audit planning
memorandum is a standing arrangement made by the auditor for the continuing engagement of a
particular client. Hence, an audit plan is a plan for the audit of one client for one year while audit
planning memorandum is a standing plan for the continuing audit of a client from year to year.
Points for Consideration in Audit Planning: Audit planning requires a high degree of discipline
on the part of the auditor. In order to make the planning more meaningful, the auditor should take
into consideration the following matters in relation to the audit engagement:
(a) Preliminary Work to be done in addition to the real audit work

This will include such matters as stocktaking, cash count, debtors’ circularisation and review of
previous year’s working papers. This will remind the auditor of those matters brought forward from
the previous year and any other points to be resolved in the current year or problems anticipated.
(b) Changes in legislation, accounting or any auditing standards or guidelines

The auditor should acquaint himself with all the changes that took place during the year in
applicable legislation, accounting and auditing standard. This will help an auditor in carrying out the
auditing assignment in away that meets the legislative requirement.

(c) Analytical review of available management accounts and other management
information that relate to the accounts
This will assist in establishing valuable ratios and indicators that will guide the auditor. For instance,
the computation of the gross profit percentage compared with that of the previous year will provide a
good indicator to the auditor of the accuracy and reliability of sales and cost of sales.
(d) Changes in the business or management

The appointment of a new finance controller and the establishment of a new business line or the
creation of a new branch are significant changes in the circumstances of the company which will
necessitate changes in the existing audit plans. There may be similary changes for which change
may be required in audit plan.
(e) Changes in the accounting system

The introduction of computers such that when a company introduces significant changes in its
operating procedures will require a review and evaluation of the system of internal control.
(f) Deadlines established for the submission of audit report

Where a client has set deadlines for its statutory activities such as theannual general meeting, it is
important for the auditor to work in line with such programmes.
(g) Use of Rotational Testing and Verification

In practice, the auditor may not carry out a hundred percenttesting or verificationof the client’s
transactions or segments of the business. Where rotational testing or verification is adopted, it will be
necessary for the auditor to determine ahead of the date of the engagement which aspects of the
business should be selected for testing or verification. An example of rotational testing could be
applied on the client’s branches to be visited.
2. AUDIT PROGRAMME
Audit programme contains step by step instructions to be carried out by team members i.e. it is
simply a list of audit procedures to be executed by team members.
Audit programme or audit program is not a name of any computer program. Also it has nothing to
do with computer programming in any way. However, audit programmes can be made using
computer software in computer assisted auditing environment
Even though audit programme sets out the whole agenda for every member of the team but the main
users are juniors for whom it acts as a dictation to be followed. The main purpose of audit
programme is that every material area has been audited appropriately and sufficient appropriate
audit evidence has been obtained in respect of every important areas of audit.
Audit programmes are prepared on the basis of audit plan usually by the auditor - who in the audit
team is either partner or manager. But sometimes, audit firms have a basic audit programme and the
same is used by the auditor after making some modifications to it to make it according the audit

engagement in hand.
Mostly it is in the form of a checklist which can be used by the juniors to make sure every required
procedure has been implemented. This can also help in monitoring the work of juniors in specific or
assistants in general.
Audit programmes may be laid down in advance for the whole year for some aspects of the audit
which auditor expects to be audited after regular intervals of time or when needed. For
understandability and convenience, audit programmes are written for each audit area separately and
then assigned to specific team members.
3. SAMPLE AUDIT PROGRAM FOR CASH AUDIT

1. Discuss and document with the cashier about the procedures for the receiving and
disbursement of cash.
A. sources of cash (funds)
B. frequency of deposits
C. who makes the deposits
D. the level of “cash” received
E. the nature of documentation of expenditures (invoices, check requests, agreements...)
F. authorization procedures
2. Determine whether the level of cash held in the field and in the office is appropriate.
3. For petty cash funds
- Is an accurate petty cash voucher maintained?
- Are physical cash counts
(a) Conducted routinely by a person or people who are not direct custodians of the
petty cash funds?
(b) Reconciled with the petty cash voucher? Can all variances be explained?
(c) Documented by those people who performed the counts and reconcile these counts
against the petty cash voucher?
- Is access to petty cash funds restricted? Who has access to these funds?
4. For all field checking accounts
(a) Determine the number of signatures required on each check.
(b) Determine the process by which cash is received for mission operations.
(c) Obtain bank statements for each bank account.
(d) Determine the frequency and timing of the preparation of bank reconciliations. Who
does the reconciliations?
(e) Summarize a listing of deposits from the bank statements and reconcile the amounts
with reported home office transfers and other sources of income reflected on the field’s
financial reports.
(f) Obtain bank reconciliations and test for accuracy.
(g) Verify whether a second party reviews bank reconciliations monthly. These
examinations should be documented with a date of examination and a signature of the

second party.
4. VOUCHING
Vouching means the examination of documentary evidence in support of entries to establish the
arithmetic accuracy. When the auditor checks the entries with some documents it is called vouching.
Vouching is the acid test of audit. It tests the truth of the transaction recorded in the books of
accounts. It is an act of examining documentary evidence in order to ascertain the accuracy and
authenticity of the entries in the books of accounts.
In short, vouching means to examine the evidence in support of any transaction or entry recorded in
the books of accounts. Vouching does not merely see that the entries and transactions are supported
by proper documentary evidence. The auditor should be satisfied that they are properly maintained,
they are supported by all evidence and they are correctly recorded in the books of accounts.
5. VOUCHER
Any documentary evidence supporting the entries in the records is termed as a voucher. Any
document, which supports the entries in the books of accounts and establishes the arithmetical
accuracy, is called a voucher.
EXAMPLES OF VOUCHERS
A bill, a receipt, an invoice, goods received note, salaries and wages sheets, goods inward and
outward register, stores records, counterfoil of a cheque book, counterfoil of pay-in-slip book, bank
statement, bank pass book, delivery challans, agreements, a material requisition slip, copy of
purchase order, minute book, rnemorandum and articles of association, partnership deed, trust deed,
prospectus etc. are the examples of vouchers.
6. OBJECTIVES OF VOUCHING
The basic objectives of vouching are as under:
1. To ensure that all the transactions are properly recorded in the books of accounts.
2. To see the proper evidence supports all the entries of the transactions.
3. To make sure that fraudulent transactions are not recorded in the books of accounts.
4. To see that all transactions relating to business are recorded in the books of accounts.
5. To see that all transactions are properly authenticated by a responsible person.
7. IMPORTANCE OF VOUCHING
- Ensures genuineness of the transactions
- Enables to know transactions
- Helps to know relevance of the transaction
- Facilitates proper allocation of capital & revenue, expenditure

- Detects frauds and errors
- Decides authenticity of transactions
- Ensures proper accounting
- Compliance with law
- Ensures proper disclosure
The special considerations to be borne in mind by the auditor in the course of vouching
- The date of the voucher falls within the accounting period;
- The name as recorded and as contained in voucher is same
- Voucher/transactions therein are duly and properly authorized by the relevant signatory;
- The transaction for which payment have been made or amount have been received relates to
business.
- The transactions being examined belongs to the entity and took place during the relevant
period;
- Whether any alteration has been done in the voucher, if so whether it has been duly recorded
and authorized.
- Whether any control number maintained on voucher or not. Whether there is any missing
number or voucher.
- The transaction is recorded in the proper account and revenue or expenses is properly
allocated to the accounting period.
- All transactions which have actually occurred have been recorded.
8. VERIFICATION
Verification is a process by which an auditor satisfies himself about the accuracy of the assets and
liabilities appearing in the Balance Sheet by inspection of the documentary evidence available.
Verification means proving the truth, or confirmation of the assets and liabilities appearing in the
Balance Sheet.
Thus, verification includes verifying:-
1. The existence of the assets
2. Legal ownership and possession of the assets
3. Ascertaining that the asset is free from any charge, and
4. Correct valuation
According to the ‘statement of auditing practices’ issued by ICAI, “the auditor’s object in regard to
assets generally is to satisfy that:
1. They exist,
2. They belong to the client,
3. They are in the possession of the client or the persons authorized by him,
4. They are not subject to undisclosed encumbrances or lien, They are stated in the balance
sheet at proper amounts in accordance with sound accounting principles, and
5. They are recorded in the accounts.

9. POINTS TO BE CONSIDERED IN VERIFICATION
While conducting verification following points should be considered by the auditor:-
1. Existence: The auditor should confirm that all the assets of the company physically exist on
the date of balance sheet.
2. Possession: The auditor has to verify that the assets are in the possession of the company on
the date of balance sheet.
3. Ownership: The auditor should confirm that the asset is legally owned by the company.
4. Charge or lien: The auditor has to verify whether the asset is subject to any charge or lien.
5. Record: The auditor should confirm that all the assets and liabilities are recorded in the
books of account and there is no omission of asset or liability.
6. Audit report: Under CARO the auditor has to report whether the management has
conducted physical verification of fixed assets and stock and the difference, if any, between
the physical inventory and the inventory as per the book.
7. Event after balance sheet date: The auditor should find out whether any event after the
date of balance sheet has affected any items of assets and liabilities.
10. SCOPE OF VERIFICATION

Verification includes information on the following:-
1. That the assets were in existence on the date of the balance sheet.
2. That the assets had been acquired for the purpose of business only.
3. That the assets had been acquired under a proper authority.
4. That the right of ownership of the assets vested in the organization.
5. That the assets were free from any charge.
6. That the assets were properly valued and disclosed in the balance sheet.
11. OBJECTS OF VERIFICATION

Following are the objects of verification of assets and liabilities.
1. To show correct valuation of assets and liabilities.
2. To know whether the balance sheet exhibits a true and fair view of the state of affairs of the
business.
3. To find out the ownership and title of the assets.
4. To find out whether assets were in existence.
5. To detect frauds and errors, if any.
6. To find out whether there is an adequate internal control regarding acquisition, utilisation
and disposal of assets.
7. To verify the arithmetic accuracy of the accounts.
8. To ensure that the assets have been recorded properly.

12. ADVANTAGES OF VERIFICATION
Advantages of verification are as under:-
1. It avoids manipulation of accounts.
2. It guards against improper use of assets.
3. It ensures proper recording and valuation of assets.
4. It exhibits true and fair view of the state of affairs of the company.
13. TECHNIQUES OF VERIFICATION:

 Inspection: It means physical inspection of the assets i.e. company cash in the cash box,
physical inventory, inspection of shares certificates, documents etc.
 Observation: The auditor may observe or witness the inspection of assets done by others.
 Confirmation: It means obtaining written evidence from outside parties regarding existence
of assets.
14. VERIFICATION OF ASSETS

The term ‘verification’ signifies the physical examination of certain class of assets and confirmation
regarding certain transactions. Sometimes verification is confused with vouching but they differ
from each other on the nature and depth of the examination involved. Vouching goes to prove the
arithmetical accuracy and the genuineness of the transactions, whereas verification goes to enquire
into the value, ownership, existence and possession of assets and also to confirm whether they are
free from any mortgage or charge. The fact of the presence of any entry regarding the acquisition of
asset does not prove that the particular asset actually exists on the Balance Sheet date, rather it
purports to prove that the asset ought to exist; on the other hand, verification through physical
examination and confirmation proves whether a particular asset actually exists without having any
charge on the date of the Balance Sheet.
Verification of assets involves the following steps:
1. Enquiry into the value placed on assets;
2. Examination of the ownership and title deeds of assets;
3. Physical inspection of the tangible assets; and
4. Confirmations regarding the charge on assets;
5. Ensuring that the assets are disclosed, classified and presented in accordance with
recognized accounting policies and legal requirements.
15. DISTINCTION BETWEEN VOUCHING AND VERIFICATION

Verification is made on the basis of vouching. So, verification is a part of vouching. Even though
they have some differences which are as follows:
 Meaning
Verification is the act of checking title, possession and valuation of assets but vouching is the act of
checking the records with the help of evidential documents.

 Nature
Verification is specially related to the assets and liabilities but vouching is related to all the
accounting documents.
 Person
Generally, assistant staff or auditor performs the work of vouching but auditor himself performs the
work of verification.
 Time
Vouching is made at the beginning of auditing but verification is made at the end of auditing or at
the time of checking balance sheet.
16. DOCUMENTATION
“The skill of an accountant can always be ascertained by an inspection of his working papers.”—
Robert H. Montgomery, Montgomery’s Auditing, 1912
Meaning of Documentation
The word “document” is used to refer to a written or printed paper that bears the original, official, or
legal form of something and can be used to furnish decisive evidence or information.
“Documentation” refers to the act or an instance of the supplying of documents or supporting
references or records.
“Documentation” refers to the working papers prepared or obtained by the auditor and retained by
him, in connection with the performance of the audit.
Form and content of documentation

The form and content of audit documentation should be designed to meet the circumstances of the
particular audit. The information contained in audit documentation constitutes the principal record of
the work that the auditors have performed in accordance with standards and the conclusions that the
auditors have reached. The quantity, type, and content of audit documentation are a matter of the
auditors’ professional judgment. The Audit documentation therefore is not restricted to being only
on papers, but can also be on electronic media.
Generally the factors that determine the form and content of documentation for a particular
engagement are:
 The nature of the engagement.
 The nature of the business activity of the client.
 The status of the client.
 Reporting format.
 Relevant legislations applicable to the client.
 Records maintained by the client.
 Internal controls in operation.
 Quality of audit assistants engaged in the particular assignment and the need to direct and
supervise their work.

17. Permanent and Current Audit files
In the case of recurring audits, some working paper files may be classified as permanent audit files,
which are updated currently with information of continuing importance to succeeding audits. In
contrast current audit files contain information relating primarily to the audit of a single period.
Content of permanent audit file

A. Copy of initial appointment letter if the engagement is of recurring nature.
B. Record of communication with the retiring auditor, if any, before acceptance of the
appointment as auditor.
C. NOC from previous auditor.
D. Information concerning the legal and organisational structure of the entity.
In the case of a company, this includes the Memorandum and Articles of Association.
In the case of a statutory corporation, this includes the Act and Regulations under which
the corporation functions, i.e.
 In case of partnerships- Partnership deed.
 In case of trusts- Trust deed.
 In case of societies- Certificate of registration/ Rules and Bye-laws.
E. Organisational structure of the client.
F. List of governing body including Name, Address and contact details. For instance, the
list of directors in case of a company, list of partners in a partnership and list of trustees
in a trust.
G. Extracts or copies of important legal documents, agreements and minutes relevant to the
audit.
H. A record of the study and evaluation of the internal controls related to the accounting
system. This might be in the form of narrative descriptions, questionnaires or flow charts,
or some combination thereof.
I. Copies of audited financial statements for previous years
J. Analysis of significant ratios and trends
K. Copies of management letters issued by the auditor, if any.
L. Notes regarding significant accounting policies.
M. Significant audit observations of earlier years.
N. Assessment of risks and risk management
O. Major policies related to Purchases and Sales
P. Details of sister concerns
Q. Details of Bankers, Registrars, Lawyers etc
R. Systems and Data Security policies
S. Business Continuity Plans

Content of current audit file
The current file normally includes:
(a) Correspondence relating to acceptance of annual reappointment.
(b) Extracts of important matters in the minutes of Board Meetings and General Meetings, as
are relevant to the audit.
(c) Evidence of the planning process of the audit and audit programme.
(d) Analysis of transactions and balances.
(e) A record of the nature, timing and extent of auditing procedures performed, and the
results of such procedures.
(f) Evidence that the work performed by assistants was supervised and reviewed.
(g) Copies of communications with other auditors, experts and other third parties.
(h) Copies of letters or notes concerning audit matters communicated to or discussed with the
client, including the terms of the engagement and material weaknesses in relevant internal
controls.
(i) Letters of representation or confirmation received from the client.
(j) Conclusions reached by the auditor concerning significant aspects of the audit, including
the manner in which exceptions and unusual matters, if any, disclosed by the auditor’s
procedures were resolved or treated.
(k) Copies of the financial information being reported on and the related audit reports.
(l) Audit review points and highlight.
(m) Major weakness in Internal control
18. Need for Audit documentation

The audit working papers (current and permanent) for a client audit engagement should be
sufficiently detailed to enable another appropriately experienced and competent auditor who is not
familiar with the client to obtain an overall understanding of the engagement.
19. The need for Working papers

The need for Working papers listed as follows:
(a) They aid in the planning and performance of the audit;
(b) They aid in the supervision and review of the audit work and to review the quality of work
performed, in accordance with AAS 17 “Quality Control for Audit Work”;
(c) They provide evidence of the audit work performed to support the auditor’s opinion;
(d) They document clearly and logically the schedule, results of test, etc.;
(e) The working papers should evidence compliance with technical standards;
(f) They document that Internal control has been appropriately studied and evaluated; and
(g) They document that the evidence obtained and procedures performed afford a reasonable
basis for an opinion;
(h) They retain a record of matters of continuing significance to future audits of the entity;

(i) They enable an experienced auditor to conduct quality control reviews in accordance with
Statement on Peer Review issued by the Institute of Chartered Accountants of India;
(j) The process of preparing sufficient audit documentation contributes to the quality of an audit
(k)They fulfil the need to document oral discussions of significant matters and communicate
to those charged with governance, as discussed in AAS 27, “Communication of Audit Matters
with those Charged with Governance.
20. GUIDANCE TO STAFF ON AUDIT DOCUMENTATION

Proper guidance should be given to staff regarding the following:
(a) Filing/keeping of working papers.
(b) Checklist of documents to be obtained and maintained.
(c) Indexing of documents/ working papers.
(d) Proper numbering/ sequencing of working papers.
(e) Summarizing of overall findings.
(f) Writing of queries.
(g) Discussing with seniors on matters of importance.
(h) Disposing of Query -at staff level/ senior level/ partner level.
(i) Importance of the working papers to be signed, dated and approved by relevant level of audit
staff with sufficient cross reference.
(j) Importance of depicting the client’s name, file number, accounting period, subject of working
paper and reference of working paper with current or permanent file.
21. RETENTION OF WORKING PAPERS/ DOCUMENTS
Period of retention
The auditor should retain the working papers for a period of time sufficient to meet the needs of his
practice and satisfy any pertinent legal or professional requirements of record retention.
Ownership and custody

Working papers are the property of the auditor. The auditor may, at his discretion, make portions of
or extracts from his working papers available to his client.
The auditor should adopt reasonable procedures for custody and confidentiality of his workingpapers
General guidelines for the preparation of working papers are:

1. Clarity and Understanding - As a preparer of audit documentation, step back and read
your work objectively. Would it be clear to another auditor? Working papers should be clear
and understandable without supplementary oral explanations. With the information the
working papers reveal, a reviewer should be able to readily determine their purpose, the
nature and scope of the work done and the preparer’s conclusions.

2. Completeness and Accuracy - As a reviewer of documentation, if you have to ask the audit
staff basic questions about the audit, the documentation probably does not really serve the
purpose. Work papers should be complete, accurate, and support observations, testing,
conclusions, and recommendations. They should also show the nature and scope of the work
performed.
3. Pertinence – Limit the information in working papers to matters that are important and
necessary to support the objectives and scope established for the assignment.
4. Logical Arrangement - File the working papers in a logical order.
5. Legibility and Neatness - Be neat in your work. Working papers should be legible and as
neat as practical. Sloppy work papers may lose their worth as evidence. Crowding and
writing between lines should be avoided by anticipating space needs and arranging the work
papers before writing.
6. Safety - Keep your work papers safe and retrievable.
7. Initial and Date - Put your initials and date on every working paper.
8. Summary of conclusions - Summarize the results of work performed and identify the
overall significance of any weaknesses or exceptions found.
21. SAMPLING
Audit sampling is the testing of less than 100% of the items within a population to obtain and
evaluate evidence about some characteristic of that population, in order to form a conclusion
concerning the population.
In an audit, sampling procedures are used because it is not practical to examine every single item in
a population. For example, the auditor may select an audit sample of non-current assets, and verify
their existence, condition and value. It would not be practical for the auditor to track down every
single asset on the books. But, if all the items in the audit sample are verified then it may be
appropriate to draw the conclusion that all the assets are correctly recorded in the books (assuming
the audit sample has been selected correctly and is of sufficient size).
22. FACTORS IN DETERMINING SAMPLE SIZE- SAMPLING RISK

1. When determining the sample size, the auditor should consider sampling risk, the tolerable
error, and the expected error.
2. Sampling risk arises from the possibility that the auditor conclusion, based on a sample, may
be different from the conclusion that would be reached if the entire population were
subjected to the same audit procedure.
3. The auditor is faced with sampling risk in both tests of control and substantive procedure as
follow:
 Tests of control:
(I) Risk of under reliance: The risk that, although the sample result does not support the
auditor’s assessment of control risk, the actual compliance rate would support such an
assessment.

(II) Risk of over reliance: The risk that, although the sample result supports the auditor’s
assessment of
control risk, the actual compliance rate would not support such as an assessment.
 Substantive procedures:
(I) Risk of incorrect rejection: The risk that, although the sample results the supports the
conclusion that a recorded account balance or class of transactions is materially misstated, in
fact it is not materially misstated.
(II) Risk of incorrect acceptance: The risk that, although the sample result supports the
conclusion that a recorded account balance or class or transactions is not materially
misstated.
4. The risk of under reliance and the risk of incorrect rejection affect audit efficiency as they
would ordinarily lead to additional work being performed by the auditor, or the entity, which
would establish that the initial conclusions were incorrect. The risk of over reliance and the
risk of incorrect acceptance affect audit effectiveness and are more likely to lead to an
erroneous opinion on the financial statements than either the risk of under reliance or the
risk of incorrect rejection.
5. Sample size is affected by the level of sampling risk the auditor is willing to accept from the
results of the sample. The lower the risk the auditor is willing to accept, the greater the
sample size will need to be.
23. TOLERABLE ERROR

Tolerable error is the maximum error in the population that the auditor would be willing to accept
and still concludes that the result from the sample has achieved the audit objective. Tolerable error is
considered during the planning stage and, for substantive procedures, is related to the auditor’s
judgement about materiality. The smaller the tolerable error, the greater the sample size will need to
be. In tests of control, the tolerable error is the maximum rate of deviation from a prescribed control
procedure that the auditor would be willing to accept, based on the preliminary assessment of control
risk. In substantive procedures, the tolerable error is the maximum monetary error in an account
balance or class of transactions that the auditor would be willing to accept so that when the results of
all audit procedures are considered, the auditor is able to conclude, with reasonable assurance, that
the financial statements are not materially misstated.
24. Expected Error

If the auditor expects error to be present in the population, a larger sample than when no error is
expected ordinarily needs to be examined to conclude that the actual error in the population is not
greater than the planned tolerable error. Smaller sample sizes are justified when the population is
expected to be error free. In determining the expected error in a population, the auditor would
consider such matters as error levels identified in previous audits, changes in the entity’s procedures,
and evidence available from other procedures

24. SELECTION OF THE SAMPLE
The auditor should select sample items in such a way that the sample can be expected to be
representative of the population. This requires that all items in the population have an opportunity of
being selected.
While there are a number of selection methods, three methods commonly used are:
Random selection, which ensures that all items in the population have an equal chance of selection,
for example, by use of random number tables.
Systematic selection, which involves selecting items using a constant interval between selections,
the first interval having a random start. The interval might be based on a certain number of items
(for example, every 20th voucher number) or on monetary totals (for example, every ' 1,000 increase
in the cumulative value of the population). When using systematic selection, the auditor would need
to determine that the population is not structured in such a manner that the sampling interval
corresponds with a particular pattern in the population. For example, if in a population of branch
sales, a particular branch’s sales occur only as every 100th item and the sampling interval selected is
50, the result would be that the auditor would have selected all, or none, of the sales of that
particular branch.
Haphazard selection, which may be an acceptable alternative to random selection, provided the
auditor attempts to draw a representative sample from the entire population with no intention to
either include or exclude specific units. When the auditor uses this method, care needs to be taken to
guard against making a selection that is biased, for example, towards items which are easily located,
as they may not be representative.
25. TEST CHECKS AND TECHNIQUES OF TEST CHECKING

Carrying out detailed check of each and every transaction of a large business shall be time
consuming for the auditor. In auditing the accounts of a business, every single copy is not usually
checked by the auditor; what is usually done in practice is that a representative number of entries of
each class are selected and checked and if they are found correct, the remaining entries are taken to
be correct. This is known as Test Checking. In those organizations, where satisfactory internal check
system is in existence, the auditor need not carry out detailed checking. He may adopt Test
checking. It is a system of sampling employed by the auditor for the purpose of reducing the volume
of detail checking involved in the audit. If, in Test Checking, he finds that the records checked by
him are correct then no further detail checking need be carried out.

26. TEST CHECKING V/S STATISTICAL SAMPLING
Selection of items for the purpose of checking can be done in two ways: (i) Judgment (ii) Statistical
Sampling. When the judgment method is applied, the method of checking is called test checking.
When sampling techniques are applied it is called statistical sampling.
Precautions To Be Taken - While adopting the test check, the auditor must take the following
precautions:
1. Entries selected for test checking must be representative of all transactions.
2. The selection of the items should be at random.
3. It cannot be adopted in case of vouching the cash book.
4. Client’s staff should not come to know of the entries selected for test checking.
5. Period selected for test checking should differ from book to book and year to year.
6. He should not adopt test checking where the law requires thorough audit.
7. A number of entries of the first and last month of the year must be checked thoroughly.
8. Test should be so devised that a sizeable portion of the work done by each employee is
checked.
9. Control accounts or impersonal ledger should not be subject to test checking.
10. Auditor should select the test independently without regard to the suggestions of the member
of the client’s staff.
11. Bank statement and entries for cash withdrawal and cash deposits should be checked in full.
Advantages of Test Check

1. Volume of work is considerably reduced.
2. There is a saving in terms of time, cost and energy.
3. The extra time available can be utilised for concentrating on areas of considerable
importance.
4. If done carefully, test checking can be quite effective.
Disadvantages of Test Check

1. The auditor always is under fear whether he has missed out certain important items or that
errors have remained undetected while test checking.
2. Where the client’s staff is aware that the auditor resorts to test checking, the staff may
become careless.
27. Auditor’s Liability

If any errors are found in the accounts the auditor cannot take the shield against the fact that he
conducted test check. The auditor should very carefully select the items for test check and ensure on
the whole that the accounts show a true and fair view of the Profit/Loss in the case of the Profit &
Loss Account and of the state of affairs of the organisation in the case of Balance Sheet.

JUNE 2014
325
: 6 :
PART – B
5. (a) What constitutes a 'true and fair view' in an auditor's judgment in a particular
circumstance ?
(b) Explain the role of internal audit in corporate governance and internal control.
(c) Explain the different approaches used in statistical sampling during an audit.
(5 marks each)
Attempt all parts of either Q.No. 6 or Q.No. 6A
6. (a) What does SA 230 (Revised) say about utility, ownership, custody and retention of
working papers ?
(b) In a medium size trading organisation, the accountant was given additional responsibility
of making recoveries from receivables. On one occasion, an insurance claim of `75,000
was received. He credited the same to the account of a debtor and misappropriated the
cash which he had recovered from the said receivable. Pinpoint the weaknesses in the
internal control which led to this situation.
(c) In case of government companies, Comptroller and Auditor General of India has a right
to issue direction to auditors and do supplementary audit. Explain.
(5 marks each)
OR (Alternate question to Q.No. 6)
6A. (i) Director (Finance) of KK Ltd. informed their newly appointed statutory auditor that they
have sound internal control system implemented by a renowned professional firm and
he is satisfied with its effectiveness and functioning. Therefore, the statutory auditor should
concentrate on verifying only the routine books and financial statements.
As an auditor, how would you react to the situation.
(5 marks)
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325
: 7 :
(ii) Prepare a sample audit programme for auditing the receipt of fees from the students of
a government college.
(5 marks)
(iii) Explain the requirement of cost audit in brief.
(5 marks)
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DECEMBER 2015
325
: 7 :
(ii) Machinery (book value `3,00,000) and furniture (book value `60,000) of S Ltd.
were revalued at `4,50,000 and `45,000 respectively for the purpose of fixing
the price of its shares. Book value of other assets remaining unchanged. These
values are to be considered for consolidation purpose.
From the above balance sheets and additional information, prepare a consolidated balance
sheet as at that date.
(8 marks)
PART — B
5. (a) What are the qualifications and disqualifications prescribed under the Companies
Act, 2013 for appointment of auditors ?
(b) Discuss the provisions relating to rotation of auditors under the Companies Act, 2013.
(c) What are the services which cannot be rendered by a statutory auditor of a company
under section 144 of the Companies Act, 2013 ?
(5 marks each)
6. (a) Audit working papers are of great need to auditors in discharge of their duties. In what
way is it helpful to them ? Discuss.
(b) What is 'internal check' ? Distinguish between 'internal check' and 'internal audit'.
(c) What are the objectives of review of management information system ?
(5 marks each)
6A. (i) What points should be considered by the auditor while verifying the fixed assets of a
company ?
(ii) Discuss the procedure of issuing auditing standards.
(iii) Explain the role of CAG in the functioning of financial committees of the Parliament.
(5 marks each)
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2/2014/CAAP (N/S) P.T.O.

JUNE 2015
325
: 7 :
Rose Ltd. Lily Ltd.

(`) (`)
II. ASSETS
(1) Non-current Assets
(a) Fixed assets
(i) Tangible assets (Plant) 4,20,000 3,20,000
(ii) Intangible assets (Goodwill) 1,00,000 70,000
(2) Current Assets
(a) Inventories 1,83,000 1,65,000
(b) Trade receivables 5,73,800 3,45,800
(c) Cash and cash equivalents 1,96,000 2,19,180
TOTAL 14,72,800 11,19,980
Further Information :
(a) Plant of Rose Ltd. and Lily Ltd. is worth `3,90,000 and `3,50,000 respectively.
(b) Goodwill of Rose Ltd. and Lily Ltd. is to be valued at `1,50,000 and `1,00,000
respectively.
(c) Stock of Lily Ltd. is over-valued by 10% above its cost.
(d) Rose Ltd. is taking over Lily Ltd. by issue of shares at the intrinsic value.
(e) All the assets and liabilities of Lily Ltd. were incorporated in the books of
Rose Ltd. at fair value and assets and liabilities of Rose Ltd. have been carried
at carrying values only.
You are required to prepare post absorption balance sheet of Rose Ltd.
(7 marks)
PART – B
5. (a) Explain the penal provisions applicable to auditors under the Companies Act, 2013.
(b) What are the important matters which an auditor should ensure to ascertain and establish
true and fair view ?
(c) Differentiate between 'secretarial audit' and 'internal audit'.
(5 marks each)
1/2015/CAAP P.T.O.
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: 8 :
6. (a) Explain the procedure of fraud reporting by an auditor as per the Companies Act, 2013.
(b) What are the techniques of internal control system ? Discuss with examples.
(c) What is audit in-depth ? Mention the various stages in purchase of goods.
(5 marks each)
6A. (i) What are the points for consideration in audit planning in relation to the audit
engagement ?
(ii) What precautions should be taken while adopting test checking ?
(iii) Distinguish between 'audit' and 'investigation'.
(5 marks each)
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1/2015/CAAP Contd ........

DECEMBER 2015
325
: 7 :
Additional information :
— Original cost of machinery sold was `55,000. The written down value as on
the date of sale was `30,000.
— Depreciation on fixed assets as per Schedule II of the Companies Act, 2013
was `4,75,340.
You are required to calculate and comment on managerial remuneration in the following
cases in accordance with the provisions of the Companies Act, 2013 if :
(i) there is only one whole-time director;
(ii) there are two whole-time directors; and
(iii) there are two whole-time directors, a part-time director and a manager.
(7 marks)
PART – B
5. (a) What do you mean by 'efficiency audit' ? How does it help the management of an
enterprise ?
(b) Distinguish between 'internal control' and 'internal audit'.
(c) An auditor appointed under Rule 3 of the Companies (Audit and Auditors) Rules, 2014
is required to submit a certificate and notice to the Registrar of Companies. State the
matters to be covered in the certificate and name of the form of the notice required
to be submitted.
(5 marks each)
6. (a) What is the difference between 'inter-firm comparison' and 'intra-firm comparison' ?
Explain the usefulness of ratio analysis in inter-firm comparison.
(b) Draft an internal control questionnaire for review of goods receiving procedures and
controls.
(c) Audit documentation is pivotal to auditing process. In this context, mention any ten
documents and records which should be kept in permanent audit file.
(5 marks each)
2/2015/CAAP P.T.O.
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: 8 :
6A. (i) Following data is extracted from the books of Right Ltd., an unlisted company for the
accounting year 2014-15 :
— Equity share capital : `40 crore (80% of equity shares are held by the
Central Government)
— Outstanding term loans
from various banks on
balance sheet date : `85 crore (maximum outstanding balance during
preceding accounting year was `118 crore)
— Turnover for the year : `1,750 crore.
Considering the above, answer the following questions with brief reasoning —
(a) Should the company be subject to CAG audit ?
(b) Is the company required to appoint internal auditor ?
(c) Is the company required to appoint secretarial auditor ?
(d) Can the company appoint statutory auditor ?
(e) Is it compulsory for the company to appoint cost auditor ?
(5 marks)
(ii) Distinguish between 'vouching' and 'verification'.
(5 marks)
(iii) In the course of audit of Growth Ltd. you want to review the internal control in the
area of sales return. Mention the aspects which are to be specifically looked into to
ascertain its soundness.
(5 marks)
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2/2015/CAAP Contd ........

JUNE 2016
Roll No…………………
325
: 1 :
Time allowed : 3 hours Maximum marks : 100
Total number of questions : 6 Total number of printed pages : 8
NOTE : 1. Answer ALL Questions.

2. All working notes should be shown distinctly.
PART – A
1. (a) State how would you present 'cash and cash equivalents' under the current assets in the
balance sheet as per Schedule III of the Companies Act, 2013.
(b) Explain amortisation period in relation to intangible assets. When this period needs to be
reviewed and changed ?
(c) Board of directors of Mahua Ltd. wants to attach Directors' report to the balance sheet to
be presented at the annual general meeting and seeks your help in preparing the same.
Enumerate any ten matters on which information is required to be given in such report.
(d) Moon Ltd. issued 5,000 debentures of `100 each at a discount of 10%. The expenses on
issue amounted to `20,000. The company wants to redeem the debentures at the rate of
`1,00,000 each year commencing with the end of fifth year. How much discount and
expenses should be written off in each year ?
(e) Following is the extract of balance sheet of Sunrise Ltd. as on 31st March, 2015 :
`
Issued and subscribed capital :
40,000, 10% Preference shares of `10 each fully paid 4,00,000
1,80,000 Equity shares of `10 each, `7.50 paid-up 13,50,000
Reserves and surplus :
Capital reserve 1,60,000
General reserve 2,00,000
Securities premium 40,000
Surplus 3,20,000
The company made the final call of `2.50 per share from equity shareholders and duly
received it. Thereafter, it was decided to capitalise its reserves by issuing bonus shares at
the rate of 1 share for every 3 shares held. Capital reserve includes `80,000 being profit
on exchange of machinery.
Pass journal entries with necessary assumptions.
(5 marks each)
1/2016/CAAP P.T.O.
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: 2 :
2. (a) A company purchased 200, 12% debentures of `100 each at `97 on cum interest basis
on 1st July, 2015 for immediate cancellation. Interest is payable on 30th September and
31st March each year. Pass journal entries in the books of the company.
(b) State the functions of National Financial Reporting Authority to provide for matters relating
to accounting and auditing standards.
(c) What are the provisions regarding creation and adequacy of debenture redemption reserve
(DRR) in each of the following cases :
(i) All India public financial institutions regulated by Reserve Bank of India and banking
company.
(ii) Non-banking financial institutions registered with the Reserve Bank of India.
(iii) Other companies including manufacturing and infrastructure companies.
(d) State the purposes for which balance in securities premium account can be utilised.
(e) State how would you present short-term loans and advances under current assets in the
balance sheet of a company as per Schedule III of the Companies Act, 2013 ?
(3 marks each)
2A. (i) From the following information, calculate the value of shares of `10 —
(a) On dividend basis; and
(b) On return on capital employed basis.
Year Capital employed Profit Dividend Weight
(`) (`)
2011 10,00,000 80,000 12% 1
2012 16,00,000 1,60,000 14% 2
2013 20,00,000 2,20,000 16% 3
2014 25,00,000 3,75,000 18% 4
The market expectation being 10%. Use weighted average for calculation.
(5 marks)
(ii) Vibgyor Ltd. is unaware of the manner and details of presentation of long-term loans and
advances to be given in the balance sheet as per Schedule III of the Companies Act, 2013.
Advise the company with the contents and manner of its disclosure.
(5 marks)
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: 3 :
(iii) Following balances appeared in the books of Bahubali Ltd. as on 1st April, 2014 :
14% Debentures `15,00,000
Balance of sinking fund `12,00,000
Sinking fund investment `12,00,000
Following further information is provided :
— Sinking fund investment is represented by 10%, `13,00,000 secured government
bonds.
— Annual contribution to sinking fund is `2,40,000 on 31st March each year.
— Balance at bank on 31st March, 2015 is `6,00,000 before receipt of interest.
— Investment was sold at 90% on 31st March, 2015.
— Debentures were redeemed at 10% premium on 31st March, 2015.
Prepare necessary ledger accounts for the year ended 31st March, 2015.
(5 marks)
3. (a) Extract of ledger balances of Kalpana Ltd. as on 31st March, 2015 includes the
following :
`
2,000, 12% Preference shares of `100 each, fully paid 2,00,000
Surplus 40,000
Securities premium 12,000
Under the terms of issue, the preference shares are redeemable on 31st March, 2015 at a
premium of 10%. The directors desire to make a minimum fresh issue of equity shares of
`10 each at a premium of 5% for redemption purpose.
You are required to ascertain the amount of fresh issue to be made and pass necessary
journal entries in the books of the company.
(5 marks)
(b) Following are the details of various outstanding liabilities of Inefficient Ltd. which went
into liquidation on 1st April, 2015 :
(i) Government taxes payable :
2013-14 : `22,000
2014-15 : `21,000
(ii) Electricity and water charges payable to government on 31st March, 2015 : `20,000
1/2016/CAAP P.T.O.
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: 4 :
(iii) Wages of Staff 'A' for 5 months @ `4,000 per month

(iv) Wages of Staff 'B' for 4 months @ `6,000 per month
(v) Accrued holiday remuneration of Staff 'C' : `21,000
(vi) Compensation payable to Staff 'D' under the Employees' Compensation
Act, 1923 : `25,000
(vii) Provident fund and gratuity payable to Staff 'E' : `30,000
Calculate the amount of preferential creditors.
(5 marks)
(c) Balance sheet of Zupiter Ltd. as on 31st March, 2015 is as under :

Particulars `
I. EQUITY AND LIABILITIES
(1) Shareholders' funds
Equity share capital 10,00,000
(2) Non-current liabilities
Long-term debts 15,00,000
(3) Current liabilities
(a) Trade payables 52,000
(b) Bank overdraft 1,21,000
TOTAL 26,73,000
II. ASSETS
(1) Non-current assets
Fixed assets 25,00,000
(2) Current assets
(a) Inventories 64,440
(b) Trade receivables 1,07,325
(c) Cash and bank 1,235
TOTAL 26,73,000
1/2016/CAAP Contd ........

325
: 5 :
Statement of Profit and Loss

Particulars `
Sales 15,62,000
Less : Operating expenses 9,48,000
EBIT 6,14,000
Less : Tax 2,45,600
Net operating profit after tax 3,68,400
The average rate of return of similar type of companies is 20% and risk-free rate of return
is 15%. Rate of interest charged by bank is 18% and tax rate is 40%.
Calculate economic value added (EVA).
(5 marks)
4. (a) Prepare the consolidated balance sheet from the following balance sheets of Happy Ltd.
and Joy Ltd. as on 31st March, 2015 :
Particulars Happy Ltd. Joy Ltd.
I. EQUITY AND LIABILITIES (` ) (` )
(a) Share capital
Equity shares of `10 each 4,00,000 1,50,000
(b) Reserves and surplus
General reserve 2,10,000 13,000
Surplus 1,50,000 80,000
Trade payables 40,000 59,450
TOTAL 8,00,000 3,02,450
II. ASSETS
Fixed assets 3,96,000 1,45,000
(2) Current assets
(a) Inventories 1,02,000 62,050
(b) Trade receivables 97,000 82,200
(c) Investments (in shares of Joy Ltd.) 1,80,000 —
(d) Cash and bank 25,000 13,200
TOTAL 8,00,000 3,02,450
1/2016/CAAP P.T.O.
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: 6 :
Following additional information is also given :

(i) Happy Ltd. acquired shares of Joy Ltd. on 1st April, 2014 when Joy Ltd. had
surplus of `66,000 and general reserve of `9,000.
(ii) Trade payables of Happy Ltd. included a sum of `24,000 payable to Joy Ltd.
for purchases made from Joy Ltd. on which it charged a profit of `6,000.
(iii) Joy Ltd. declared and paid interim dividend @ 8% on 2nd June, 2014.
(iv) Inventories of `1,02,000 of Happy Ltd. included unsold goods purchased from
Joy Ltd. at a cost of `18,000.
(8 marks)
(b) Alpha Ltd. decided to wind-up with effect from 31st
March, 2015 and was to be taken over
by Gama Ltd. on the basis of following balance sheet of Alpha Ltd. as on that date :
Particulars `
I. EQUITY AND LIABILITIES
(a) Share capital
1,20,000 shares of `10 each fully paid 12,00,000
(b) Reserves and surplus
Profit prior to incorporation 42,000
Surplus 5,22,000
(a) Trade payables 2,26,000
(b) Bills payable 40,000
(c) Provision for income-tax 2,20,000
TOTAL 22,50,000
II. ASSETS
Fixed assets 9,64,000
(2) Current assets
(a) Inventories 7,75,000
(b) Trade receivables 1,52,000
(c) Bills receivables 30,000
(d) Cash and bank 3,29,000
TOTAL 22,50,000
1/2016/CAAP Contd ........
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: 7 :
Gama Ltd. took over the assets at following values :
— Fixed assets : `12,80,000, Inventories : `7,70,000; Bills receivable: `30,000.

— Trade receivables realised `1,40,000.
— Bills payables and income-tax liabilities were settled at `30,000 and `2,22,000
respectively. Trade payables were finally settled with the cash remaining after
meeting liquidation expenses of `20,000.
— Purchase consideration was satisfied by Gama Ltd. as : `5,10,000 by allotment
of fully paid 10% preference shares of `100 each and the balance in equity
shares of `10 each at `8 per share paid-up.
You are required to prepare necessary accounts in the books of Alpha Ltd.
(7 marks)
PART – B
5. (a) Mention the areas in which all the joint auditors are jointly and severally responsible.
(b) What is the process of issuing audit standards by Auditing and Assurance Standards Board
(AASB) ?
(c) Differentiate between 'internal audit' and 'statutory audit'.
(5 marks each)
6. (a) Despite numerous benefits, internal audit has got some limitations. Discuss.
(b) Distinguish between 'internal control system' and 'internal check system.'
(c) What are the objectives of review of management information system (MIS) of an
organisation ?
(5 marks each)
1/2016/CAAP P.T.O.
325
: 8 :
OR (Alternative question to Q. No. 6)
6A. (i) Explain the objectives of investigation and also list out business situations where investigation
may be considered necessary.
(ii) Explain the provisions of section 139(1) of the Companies Act, 2013 regarding appointment
of auditors.
(iii) What are the important points to be considered while reviewing the 'process of taking
insurance during transit' ?
(5 marks each)
————0————
1/2016/CAAP Contd ........

325
: 7 :
On the valuation date, the net worth (excluding investments) amounts to `24,00,000.
The normal rate of return expected is 10%. The company paid dividend consistently
within a range of 10% to 12% on equity shares over the previous five years and expects
to maintain it.
(7 marks)
PART – B
5. (a) "Audit is advantageous even to those enterprises and organisations where it is not
compulsory." Discuss.
(b) As an auditor of a company, how will you instruct and guide your assistants about special
considerations to be borne in mind in the course of vouching ?
(c) Directors of Secure Ltd. are of the opinion that section 138 of the Companies Act, 2013
regarding appointment of internal auditor is not applicable to them. State the provisions
of the section regarding requirement for appointment of internal auditor.
(5 marks each)
6. (a) You are the auditor of a company covered under the Companies (Auditor's Report)
Order, 2015. Describe the matters you will cover in your report in respect of :
(i) Inventory
(ii) Maintenance of cost records.
(b) What do you mean by 'materiality' in auditing ? As an auditor of a company, how
will you comply with materiality concept in auditing ?
(c) An auditor is required to maintain audit working papers in shape of permanent
audit file and current audit file. List out any ten documents finding place in the current
audit file.
(5 marks each)
2/2016/CAAP P.T.O.
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: 8 :
6A. (i) Distinguish between 'internal check' and 'internal audit'.

(5 marks)
(ii) List out five factors that influence the reliability of audit evidence as per SA 500.
(5 marks)
(iii) An auditor appointed under the Companies Act, 2013 shall provide only such other
services as are approved by the Board of directors or audit committee but shall not
include some services. Specify the services which cannot be rendered by an auditor of
a company.
(5 marks)
————0————
2/2016/CAAP Contd ........

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PREFACE

The main features of the book are as under –

• The entire module has been covered.

• It provides comprehensive and critical study of all auditing concepts.

• All important and relevant judicial pronouncements, circulars, notifications, clarifications,

With best wishes-

Mr. Shubhamm Sukhlecha

S.NO. TOPICS PAGE NO.

1. Auditing Concepts 1.1 – 1.22

2. Types of Company Audit 2.1 – 2.24

3. Internal Audit 3.1 – 3.12

4. Internal Control 4.1 – 4.13

5. Review of Internal Control 5.1 – 5.16

6. Audit Engagement & Documentation 6.1 – 6.16

7. Past Examination papers -

Shubhamm Sukhlecha INSPIRE ACADEMY

8. BASIC PRINCIPLES GOVERNING AN AUDIT

Shubhamm Sukhlecha INSPIRE ACADEMY

Shubhamm Sukhlecha INSPIRE ACADEMY

8. The exceptional or non-recurring transactions are disclosed separately in the accounts

Shubhamm Sukhlecha INSPIRE ACADEMY

Reasons for carrying out investigation

Shubhamm Sukhlecha INSPIRE ACADEMY

12. AUDIT AND INVESTIGATION DISTINGUISHED

Shubhamm Sukhlecha INSPIRE ACADEMY

6. Extent of work: Audit is normally conducted on test verification basis. Investigation is

7. Report: Audit report of a company is addressed to shareholders (or proprietors or

8. Person performing work: Audit is to be conducted by a person having prescribed

13. MATERIALITY IN AUDITING

Materiality can be defined as the magnitude of an omission or misstatement of accounting

Shubhamm Sukhlecha INSPIRE ACADEMY

15. INTERNATIONAL AUDITING STANDARDS

16. HARMONIZATION OF INDIAN AUDITING STANDARDS WITH INTERNATIONAL

Shubhamm Sukhlecha INSPIRE ACADEMY

17. BRIEF OVERVIEW OF AUDITING STANDARDS IN INDIA

Elements of System of Quality Control

Shubhamm Sukhlecha INSPIRE ACADEMY

18. STANDARDS FOR AUDITS AND REVIEWS OF HISTORICAL FINANCIAL

Professional Judgment - Professional judgment is necessary in particular regarding decisions

Shubhamm Sukhlecha INSPIRE ACADEMY

SA 210: Agreeing the Terms of Audit Engagements

SA 220: Quality Control for an Audit of Financial Statements

Shubhamm Sukhlecha INSPIRE ACADEMY

SA 240: the Auditor’s Responsibilities Relating to Fraud in an Audit of Financial

Shubhamm Sukhlecha INSPIRE ACADEMY

SA 250: Consideration of Laws and Regulations in an Audit of Financial Statements

SA 260: Communication with those Charged with Governance

Shubhamm Sukhlecha INSPIRE ACADEMY

SA 265: Communicating Deficiencies in Internal Control to those Charged with

SA 299: Responsibility of Joint Auditors

SA 300 (Revised): Planning an Audit of Financial Statements

Shubhamm Sukhlecha INSPIRE ACADEMY

Identifying and Assessing the Risks of Material Misstatement Through

SA 320: Materiality in Planning and Performing an Audit

SA 330: The Auditor’s Responses to Assessed Risks

SA 402: Materiality in Planning and Performing an Audit

Shubhamm Sukhlecha INSPIRE ACADEMY

SA 450: Evaluation of Misstatements Identified During the Audit

SA 500: Audit Evidence

SA 501: Audit Evidence - Specific Considerations for Selected Items

SA 505: External Confirmations

SA 510: Initial Audit Engagements - Opening Balances